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Adding a member to your LLC is relatively easy. The rules for adding a member should be set out in your operating agreement, if you have one.
This article will explain the process of adding an LLC member and the tax and management consequences of doing so. It’ll also guide you through amending, or creating the operating agreement.
LLC – Limited Liability Company
An LLC is a business entity. When you form an LLC you separate yourself from your business. This is desirable because you gain a degree of liability protection.
Liability protection means that your assets are protected in case your business goes bust or owes money. No one will come after your home or car. If you’re running your business as a sole proprietorship, your personal finances are entangled with your business. So, when things go wrong, everything is at risk. You don’t want to be in that situation.
If you haven’t formed an LLC yet, you can do it online here.
What’s an Operating Agreement?
When you form an LLC, one of the documents that you can create (it’s not mandatory in most states) is an operating agreement. It sets out the rules by which your LLC will play. It’s a customizable document and can save you hassle, especially if you’re going to have other LLC members. In case of a misunderstanding, you and your partners will always have something to refer to, to clarify things.
You can always amend the operating agreement, as long as all the members agree to the changes.
Some of the things you might want to cover in the operating agreement include:
- Ownership expressed as percentages for each member;
- The profit and loss allocation among members;
- Buyout and buy-sell agreements for shares and shares transfers, in case a member passes away;
- Responsibilities and voting rights for members;
- Meetings and vote taking procedures;
- Management of the LLC.
What to Consider Before Adding Another Member?
While a new owner can bring a lot of value to the LLC, including capital, there are some risks that you should consider.
First of all, if things don’t work out, they’re not an employee. You will not be able to end things easily, unless they’re willing to sell out their shares in the LLC.
Then, another member means the decision making isn’t solely your call anymore. You’ll have to officially consult all managerial decisions with the other member.
Lastly, you’ll have to share the profits with another person and you might have to change the way you’re being taxed on your profits.
How to Add a Member to Your LLC?
There are 4 steps to adding a member to your LLC.
Step 1: Check Your Operating Agreement
First of all, if you have an operating agreement, check it to see what it currently says about adding new members.
If you don’t have an operating agreement or it doesn’t state how to add members, then you must follow the limited liability state’s laws. Some states require that you dissolve and form an LLC again if there are changes in the ownership.
Step 2: Think of the Details
LLCs are great business structures because they allow for a lot of flexibility. For example, members’ profit entitlements can be different to the percentage of the shares they own in the business.
Before adding a member to the LLC, agree their shares, profit entitlements, responsibilities, and voting rights. You have to agree this with them and the already existing members of the LLC.
Step 3: Amending the Operating Agreement
When you get all the details down, you’ll have to hold a vote on the proposed amendment to the operating agreement.
Prepare the amendment, listing all the details mentioned above, then ask the members to vote on the amendment.
Make sure you document the entire procedure, including the voting, in minutes or with a resolution. Keep the amended operating agreement safe, you might be asked to present it to a bank or other institutions at some point when doing business with them.
Step 4: Amend the Articles of Organization
If your LLC is registered in a state where the information on the LLC’s members is kept in the articles of organization, you might have to file a form with the state to amend the documents.
You can check by contacting your Secretary of State.
Step 5: Deal with the Tax
If you don’t already have an EIN, then you’ll need to get one now that your LLC has more than one member.
Your LLC can be taxed as a partnership or as a corporation. Depending on what’s more beneficial for you and the other members.
Step 6: Adjust
If you’ve been running your LLC alone, you might need to do some adjusting. Here are some tips for managing your LLC with other people.
- Use a virtual mailbox; all LLC members will be able to access the post online remotely.
- Use shared drives and tools like Google Drive or Dropbox to store information and documents.
- Hold regular management meetings to keep everyone in the loop and on the same page.
Adding a new member to your LLC is simple. Follow your operating agreement or your state’s guidance.
Here’s more information on forming an LLC online (in case you have to dissolve your current LLC to add a new member, or don’t already have one).