A Limited Liability Company (LLC) is an incredibly flexible business structure. This means that members can be added as long as the LLC follows the legal requirements and tax filings required to do so. However, adding a member to an LLC is a big decision and not one to be taken lightly. It changes the structure of your business and can be hard to undo if business relationships fail.
Below, we’ll teach you how to add a member to an LLC and also go over the implications of such a decision.
1. Evaluate the Consequences
It’s important to understand all the implications of adding a member to an LLC to ensure it’s a beneficial move for the existing members and the company. This means taking into consideration what the new member brings to the table.
Some examples of ways a new member can help a business are:
- Inject new money and funding into the business
- Bring new talents or skills to improve the business
- Bring in new relationships or customers to benefit the business
Remember, bringing in a new member means your share or the existing member’s shares of ownership will get smaller. So this new member must bring something worthwhile to offset what you’re giving up.
2. Review Your Operating Agreement
Many LLCs will have an operating agreement although some states don’t require this. An operating agreement is a founding document that outlines how the LLC operates and dictates how things such as adding members must be handled.
If you don’t have an operating agreement, in many states you can create one before adding a new member. Just make sure to clearly define how the new member will be added. If you add a member without an operating agreement, some states may require that the new member get an equal share, which may not be what you or the member wants.
3. Settle on the Terms
This is a crucial step and involves the existing members sitting down and negotiating the amount of investment the new member will bring as well as the new member’s share of ownership, profit, and loss.
It’s important to remember that shares of ownership don’t have to be equal for profit sharing or loss sharing. These are all details that can be negotiated to best serve the business and its members.
4. Amend, Vote, and File the Operating Agreement
After the existing members and the new member have successfully negotiated how they will form a partnership, a second meeting should be held for a formal vote. During this vote, records (minutes) should be kept outlining what happened during the vote and how the voting turned out. These records may be needed later should there ever be a dispute over membership.
5. Finalize the Addition of a New Member
If the voting result successfully adds the new member, then the operating agreement is amended with the pertinent information regarding the new member and their contributions as well as their responsibilities regarding liability and profit/loss sharing.
These will be added as an amendment to your current operating agreement. Different states have different requirements for what form, if any, is needed for this process.
Contact your Secretary of State’s office to learn the requirements for the state your LLC is registered in.
6. Update Your Articles of Organization
Some states also require that you update your Articles of Organization upon adding a new member. The Articles of Organization is the document filed with the state when the LLC was formed and includes all members and other founding information.
Some states will use a different name for this document and instead, call it a Certificate of Formation or something similar. However, it serves the same purpose.
This public document will need to be amended to include the new member of the LLC per the state law where the LLC was formed.
7. File Any Required Tax Documents
Adding a new member sometimes requires certain changes to tax documents related to the LLC.
Much of this depends on whether or not you were a single-member LLC before adding the new member. In this case, you will need to file for a new Employer Identification Number (EIN) as you will now be taxed as a partnership.
You may also be required to submit an IRS Form 8832 informing the Internal Revenue Service (IRS) of your entity classification change.
Help With Forming or Amending Your LLC
When forming a limited liability company as a partnership or adding members to one, can be a complicated task. Make sure to keep things organized and have a trusted partner you can rely on to help make the process simple and pain-free.
Enter doula. Our team specializes in LLC formation and critical business services like bookkeeping and business banking to make sure your LLC paperwork and documentation are always compliant with state and federal requirements.
Contact doola today and learn how we can help you with your LLC formation and amendment questions.
What are the tax consequences of adding a member to an LLC?
If changing from a single-member LLC to a partnership by adding a new member, the LLC will then be taxed as a partnership. This requires a new EIN and the LLC must file a form 8832 with the IRS to inform them of the change.
How do I add a member to my LLC in California?
California recognizes an operating agreement as an internal document, so you don’t have to file this with the state if changes are made. To begin, if you don’t have an operating agreement, draft one and include language on how members are added.
Conduct a vote of existing members to formally accept the new member into the LLC. If you’re a single-member LLC, you don’t have to go through this process. Instead, simply change your single-member operating agreement into a multi-member operating agreement, then inform the IRS of the change.
Can I add a member to my LLC in PA?
Yes. You can add a member to your LLC in PA if you follow the state’s guidelines. PA requires that you submit a Certificate of Amendment-Domestic Liability Company form with the Department of State Corporation Bureau after a member is added. You can make any other changes you wish at the same time as well.
Can I add a member to my LLC in Texas?
Yes. You will need to amend your Certificate of Formation by filing a certificate of amendment and paying a $150 fee. In section 3 of the certificate of amendment form, you can add members. If there are existing members, they must vote on accepting the new member and follow the guidelines set out in the certificate of formation for adding new members.
How do I add a member to my LLC in Arizona?
Arizona requires that all existing members vote to accept the new member into the LLC. Once that is done, the LLC must file Articles of Amendment with the state informing them of the changes to the members.
You should also update your LLC operating agreement at this time to include the new information about the new member and their role and responsibilities.