When someone has an outstanding business idea, they usually want to try to carry it out on their own. Not only is it more satisfying to achieve, but it also protects their proprietary and intellectual properties too. However, sometimes the growth of a business prompts the need to learn how to add a member to an LLC, allowing for further expansion and shared expertise.
However, there may come a time when everything’s too much to handle solo. You can hire more employees and even managers, but having other members in your LLC can be a huge help. Though you’ll have to split the profits, they’ll also ease the burden on losses.
If you’re now wondering how to add a member to an LLC, then you’re in the right place. In this article, we’ll outline how to do so.
Can I Add Someone to My LLC?
Before you get started, you should know whether this option is possible. The good news is that adding members to an LLC is entirely possible. In fact, this is another big reason why people form LLCs; the flexibility in business structure gives owners more freedom to realize their business goals.
Why Is Adding a Partner to an LLC Beneficial?
Perhaps you feel comfortable owning an LLC on your own. However, you’re open to the idea of adding members, but there needs to be a good reason before you take action.
In that case, here are some benefits you can get from adding LLC members.
Shared Responsibilities and Workload
Are you running yourself ragged handling business operations? Then an obvious solution to this stress is to divide the responsibilities and workload. When everyone shoulders a small piece of the hard work, there will be a more balanced and collaborative approach to running the business.
Plus, this will decrease the total risk you take on yourself. Having multiple partners can help distribute the financial and operational risks associated with running a business, providing an excellent level of risk mitigation.
Improved Decision-Making
If you freeze up when faced with large decisions, then you can breathe a sigh of relief when you have fellow LLC owners. There will be a diverse range of opinions and perspectives, meaning your company can make more informed and well-rounded decisions. This will reduce the likelihood of overlooking important factors.
Increased Capital and Resources
40% of small businesses eventually become profitable, but one of the most common reasons why they fail is lack of capital. So a big benefit you can get from extra LLC owners is additional capital.
New partners may contribute financial resources, assets, or other forms of capital. These can be used to fund expansion, operations, or other business needs.
Diversification of Skills and Expertise
Partners often bring different skills, expertise, and perspectives to the table. Adding new members with complementary skills can enhance the general capabilities of the company, improving its ability to navigate challenges and pursue new opportunities.
Access to a Larger Network
A new LLC owner may bring along an extensive network of contacts, clients, suppliers, or other business relationships. This expanded network can open up new opportunities for the LLC, such as partnerships, collaborations, and client acquisitions.
In addition, this can lead to the formation of strategic alliances or joint ventures. Partnerships can result in synergies, shared resources, and mutual benefits that contribute to the overall success of your business.
Enhanced Credibility
The addition of a reputable or experienced partner can enhance the credibility of the LLC in the eyes of clients, customers, suppliers, and other stakeholders. This can positively impact the public’s perception of your company, and you’ll attract more opportunities.
Preparation for Growth or Transition
Are you preparing your business for growth, expansion, or a transition? Then bringing in a partner (or two) can be a strategic move. Partnerships can facilitate the scalability of your LLC and provide a solid foundation for future developments.
How to Add a Member to an LLC
Now you know that adding a partner to an LLC is feasible. The next step is to learn how to add a member to an existing LLC so you can get the assistance you need.
Review Your Operating Agreement
The first move is to review your company’s operating agreement. It’ll outline the ownership structure, which includes the procedures for adding new members.
However, not every state requires you to have an operating agreement to create an LLC. So if your business doesn’t have one, then you’ll have to refer to your state’s LLC laws to determine how to proceed.
Get a Unanimous Vote
If you started your LLC with a partner or two, then you’ll likely have to get a unanimous vote to approve the addition of a new member. Otherwise, you can give written consent to document this approval.
Update Your Operating Agreement
Now that you’ve added a member, your operating agreement needs to reflect the changes in ownership. To do this, you’ll have to specify the new member’s details, ownership percentage, and any other relevant information.
Draft and Sign a Membership Interest Purchase Agreement (MIPA)
If the new member is purchasing an ownership interest from an existing member, then you may need a MIPA. This document should outline the terms of the sale, including the purchase price and other pertinent details.
It’s best if you consult with legal professionals to ensure this document is prepared correctly. Otherwise, you may run into issues in the future.
Update State Filings
To officially register the change in membership, you’ll have to file the necessary documents with the state. This may involve submitting an amended articles of organization or other required forms.
Check with your state’s business filing office for specific requirements.
Obtain a New Employer Identification Number (EIN)
Were you running the LLC with employees under you? Then your business has an EIN, which is like a Social Security Number.
If the new member’s addition results in a change to the management structure, then you might have to obtain a new EIN from the IRS. Also, if the LLC is member-managed and the new member becomes a manager, you’ll need an EIN update too.
Notify the Relevant Authorities
There are certain authorities that require you to inform them about changes in the LLC, such as the addition of a member. Some good places to start include the IRS and any local tax agencies.
If you’re unclear on who you need to contact, then speak with a legal or tax professional.
Update Your Banking and Business Accounts
Next, let your bank know about the new LLC member. Take care of other business accounts too, such as your checking and savings accounts.
Provide a Membership Certificate
Issue an LLC membership certificate to the new member, as this acknowledges their ownership. This legal document confirms their ownership percentage.
Document the Change
You need to keep a record of all documents related to the expansion of your company. You should include meeting minutes, amended agreements, and any correspondence you feel is relevant.
Set Your LLC Up for Success With Additional Partners
Your LLC is your brainchild, and understandably, you’re protective over it. However, it’s not always the best business decision to run it as a sole proprietor, so it’s essential that you carefully consider the pros and cons of adding a partner.
If you’ve reached the conclusion that extra company owners would be beneficial, then you now know how to add a member to an LLC. Taking the proper steps to make it happen won’t be too difficult, especially if you have the guidance of third-party professionals.
Frequently Asked Questions About Adding a Member to an LLC
1. Can I add a new member to my LLC at any time?
Yes, you can add a new member to your LLC at any time, as long as you follow the procedures outlined in your operating agreement and state requirements.
2. Do I need to update my operating agreement when adding a new member?
Yes, you should update your operating agreement to reflect the new ownership structure, member rights, responsibilities, and profit distribution.
3. Is state approval required to add a new LLC member?
In most cases, you must file an amendment to your Articles of Organization or an equivalent form with your state to officially add a member.
4. Do I need consent from existing LLC members to add someone new?
Typically, yes. Most LLCs require unanimous or majority consent from existing members, depending on what’s outlined in the operating agreement.
5. How does adding a new member affect profit distribution?
Profit and loss allocations may change depending on the new ownership percentage. These changes should be clearly documented in the updated operating agreement.
6. Will adding a new member change my LLC’s tax status?
If your LLC was previously a single-member LLC, it will automatically be treated as a multi-member LLC for tax purposes, which is taxed as a partnership unless you elect otherwise.
7. Do I need a lawyer to add a new member to my LLC?
It’s not legally required, but consulting with a lawyer or professional service can help ensure your documents are properly updated and filed with the state.
