Generally speaking, to add a new member to any LLC, you must first follow the operating agreement (“OA”) or the state law regarding LLCs. Though there are some additional things to take into consideration before adding a new a new business partner to your multi-member LLC.
Most OAs lay out how to add a new member on their operating agreement. However, if your LLC doesn’t have an operating agreement, you would need to follow your state’s laws concerning LLCs.
The process for how to add an LLC member involves amending the LLC’s operating agreement that brings in the new member.
Current LLC members must then vote on the amendment for it to pass—and most states, as well as many LLC operating agreements, require unanimous approval.
In this sense, aside from the partner’s name, you should also include their financial contribution, if any, and the new member’s share of interest in the company in its business records like an amendment to the OA.
Review Your Operating Agreement
The operating agreement that governs your LLC should lay out the process of adding a new partner, including how the members vote on the issue. If it does include this information, following the process is important because otherwise a recession action could be brought by the new business partner against the multi member LLC.
If your operating agreement does not include this process, it may be a good idea to have an attorney draft one for you. If you would rather do this yourself, many states have forms that can be tailored to the needs of your LLC.
The rule in most states is that when a new member is considered for addition, and no operating agreement exists on how to accomplish this, the agreement of all existing LLC members is needed.
can you change a single member llc to a multi member llc?
Yes, but you have to follow the rules of who can be a member of an LLC set by the state statute, or your company’s OA. Any new business partner that becomes a member will automatically become a partner equal to the current members without a written OA. However, adopting an operating agreement can change such rules, allowing new members to be let in by a majority vote, with their share being less than that of the more senior members.
Remember, an LLC is a distinct business entity that protects its owners from personal liability. Following formal procedures and keeping good records helps to maintain that protection and to avoid future disputes among the owners.
Decide the Specifics
After the process for bringing on a new member is laid out, the exact details of the arrangement should be determined. In ownership structure, LLCs have almost limitless flexibility. For instance, one could own a percentage of a business that differed from his profit percentage.
Ownership percentages should be discussed with current members of the LLC before adding a new member to make sure that all are in agreement. Unless state default rules apply because there is no operating agreement, each member’s percentage of ownership need not correspond with the percentage of capital they invest in the company.
Once this is agreed upon, the new member’s capital contribution should be collected, then the interest the new partner will own in the company and how much this will cost should be decided. In an LLC, all members need to have a capital account representing their equity contribution to the company in the form of service, property, or money.
Vote on an Amendment to Add an Owner to the LLC
Once a decision has been reached regarding the percentage of the new member’s share, an amendment to bring the oncoming member into the LLC should be prepared for addition to the operating agreement. On this amendment, there should be listed the new partner’s name, percentage of stake in the company, capital contribution, and percentage of losses and profits she will be allocated. Once this is done, a vote should be held concerning the amendment in accordance with the process in the operating agreement.
In voting on a new partner, one should remember that other partners cannot be forced unilaterally to dilute their own shares by bringing on a new member — the agreement must be mutual, and the vote must follow the rules of your operating agreement. If there is no agreement, then the vote has to comply with your state’s LLC Act, which usually demands a unanimous consensus. This is pretty straight forward for single member LLCs.
However, this vote is conducted, it should be documented in the LLC’s minutes or recorded in a resolution, and all members of the LLC (along with the newest one) should sign the amendment. This document should also state:
- The voting rights,
- managerial responsibilities,
- and ownership percentage
of each member, and it should be kept in your place of business along with your other business documents.
Amend the Articles of Organization, If Necessary
When your LLC was formed, you were required to submit articles of organization to the state. When you add a new member, certain states will require you to submit a form amending your articles, while others do not. Such state requirements can be checked through the agency that handles business filings, which is usually the secretary of state.
One should also be aware of any deadlines if an amendment is necessary. Additionally, if your business management structure is being changed from a manager-managed LLC to a member-managed LLC or vice versa, you will need to amend the articles of organization, as well.
File Required Tax Forms
Although having a single-member LLC allows you to use your Social Security number for your federal tax identification number, you will be required to get a federal Employer Identification Number (EIN) when you change to a multimember LLC. You can get this by completing a free form on the IRS website, and it will act as your LLC’s tax number for both state and federal filing.
Generally, if your LLC’s structure or ownership changes, you will need to get a new EIN; however, if you are adding a new partner and already are a multimember LLC, you most likely will not need to change your EIN. If in the past, your LLC was classified for tax purposes as a partnership or sole proprietorship, additional forms will need to be filed with the IRS in order to elect corporate status. A tax accountant or lawyer can inform you of the best way to have your LLC taxed.
Check Your State’s LLC Act
If you lack an OA, the state in which you set up your LLC has rules outlining the required steps for bringing in another member, as well as the documents that need to be submitted or amended by law.
Amend Your Operating Agreement
When bringing a new member into your LLC, numerous parts of the OA will need updating. At the least, the sections covering the percentage of shares of each of the company’s members, the dispensation of losses and profits, the member’s capital contributions, and the voting capacity of all the members must be updated. Because an oncoming member will receive a stake of the corporation, the shares of current members’ distributions, losses, and profits will be changed, and any rules in the operating agreement related to the current members’ fiscal interests must be adjusted. You can find templated copies of amended operating agreement samples if you look online. But you really need to understand them.
Submit the Amendments to the Secretary of State
If amending the articles of your organization is deemed necessary, this amendment must be filed with the secretary of state or other state agency that deals with business filings. Because operating agreements do not need to be submitted to the state, the agreement can be amended without any filing being done, although there are some states that do allow you the ability to file your OA. If you do choose this option, your amendment should be filed with it, too.
You should also check in with your secretary of state’s office to see if it is possible for the amendments to be filed online or if paper forms are required. Don’t forget to ask how much you must pay for the filing, although it is usually about $100.
Either the business filings agency in your state or your secretary of state will be able to tell you what the fees are and what they include. Should a certified copy of the filing not be included in the fee, then you also must pay for that in order to obtain a copy for your business records.
File the Entity Classification Election Form With the IRS, If Needed
Bringing a new partner to your LLC can result in the LLC’s classification being changed. If it does, an Entity Classification Election Form must be filed with the IRS. Unless a different election form is made using Form 8832, your LLC will be classified by the IRS in accordance with the default rule.
By default, multimember LLCs are regarded as partnerships for tax purposes, so if you want your LLC to be classified as a corporation, you must file Form 8832. Usually, as long as your LLC has two members prior to a new member being added, the income tax status of the LLC will not change by bringing on a new partner, and there will be no need to contact the IRS.
Register the Name Change With Federal and State Authorities, If Needed
Sometimes when a new member is added, the company’s name is changed. For instance, let’s say you and a friend ran “Jim and John’s Jukebox, LLC.” Then, a mutual friend named Jake joined the business, and thus you wanted to change the name to “Triple J Jukebox, LLC.” To accomplish this, documents would need to be filed with both the IRS and the secretary of state.
The secretary of state will require the appropriate business name change form to be filled out along with a fee that could be up to $200. The IRS would require notice of the street address where your return was to be filed, with said notice being signed by all business partners involved.
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