Before Adding a Member to an LLC
The majority of LLCs are created by just one member, a sole proprietor, who took it upon themselves to create an official business to protect their personal life from negative legal actions should something go wrong within their business.
While adding another individual into your business structure may seem like the next step in your business model, it is critical to assess the benefits and consequences of doing so before adding a partner to an LLC.
Before adding a member to a single-member LLC, or even a multi-member LLC, you should ask yourself (and your current partners, if you have any) the following questions:
- Does this potential partner seem like a good fit, or will they cause conflict?
- Do they offer value to the business?
- Will their temperament, business beliefs, and personal life sync well?
- Will this potential partner be able to help the business grow, or will they simply suck profits?
- Is this potential partner solely a financial asset, or will they want greater integration in the company?
- What will this potential partner’s roles and responsibilities be?
- Will they be able to go above and beyond the minimum requirements?
- What is this potential partner’s availability?
- Will they be active and available, or will you have to hunt them down for meetings and work projects?
If you had a single negative answer to any of these questions, you might want to rethink whether this potential partner is the right choice for your business. If you still want to add this potential partner, despite any negative answers above, critically analyze how you will solve these potential problems before making it official.
On the other hand, if you have realized that adding this partner would not be a good idea, you may be able to find a different method for them to be involved in the business without becoming a member.
How to Add a Member to an LLC
Now that you have analyzed the benefits and consequences of adding a partner to your LLC, you are ready to get started!
Whether you are wondering how to add a member to an LLC in NY or how to add a member to an LLC in Georgia, you will need to follow this six-step process.
Do keep in mind that every state has different rules and regulations concerning LLCs. You will want to consult your state’s laws and procedures before taking any official steps to guarantee proper legality.
#1 Review Your Operating Agreement
When you add someone to an LLC, you must follow the rules outlined in your business’s operating agreement. Therefore, you should review your operating agreement to freshen up on voting procedures, ownership structure, and profit distribution.
It may have been years since you last looked at this document, so make sure to do your homework before diving in headfirst. You will need to make a note of what will need to be changed or updated after onboarding a new partner, which we will explain more about in Step #3.
If your business does not yet have an operating agreement or adding new members isn’t listed within the agreement, you will need to follow the guidelines provided by the state where your business is registered.
Most states require that to add a partner to an LLC you must have a unanimous vote from the existing LLC members.
You can find out more about your specific state’s requirements through the Secretary of State websites.
#2 Setting the Terms
The second step to adding members to LLCs is setting the terms of the agreement. Such terms will include the new member’s roles and responsibilities, financial contributions, profit share, business share, and any other terms that need to be officially documented for the sake of the business.
Do you remember when we spoke about solving potential problems before they become an issue?
When setting your newly added partner’s terms, you can address these potentially negative situations and problem-solve together. Once you have a concrete agreement on handling conflicts, you can then write that into the operating agreement.
Whether these are steps required for conflict resolution or a decision to provide one member with more decision-making power than another, that is up to you.
#3 Vote & Amend Your Operating Agreement
After you have settled your new member’s terms, it is time to put it up for a vote. Before the vote, you will need to amend the operating agreement to include the new partner in the LLC. The information included in the amendment should detail the new owner’s name, any financial contribution, their share of the business and its profits, and anything else in the terms from Step #2.
Don’t forget about those conflict resolution details we talked about if you think you will need them!
Once it has all been written out, you will need to put it up for an official vote, whether it is a raising of the hands, a chorus of “aye”s, or a silent ballot. Just make sure to document the vote in your LLC’s minutes and then have all the members, including the new partner, sign the amended operating agreement.
Obviously, if you are the sole member of an LLC, this is a pretty quick process. However, just because it is fast doesn’t mean that you don’t need to be official.
It is recommended that you note your vote in your business records and sign official copies of the updated operating agreement.
#4 Update Your Official Forms
When you first created an LLC, you had to go through the charming process of submitting paperwork to the state to be official, called “articles of organization.” Whether you used an incorporations service or not, you should have those documents. This is also a good time to ensure that you’ve have been compliant with your registered agent services.
When adding a business partner to an existing business, you may still need to update those articles of organization to reflect the recent change.
Do note that this differs from state to state, so you will need to check your own state’s regulations.
Can you change a single-member LLC to a multi-member LLC?
The process of how to change a single-member LLC to a multi-member is, again, dependent on your state’s regulations. However, if your business has been a single-member LLC using your personal social security number for tax purposes, this will need to change (see Step #5).
You may need to change your business to a multi-member LLC or a corporation. If you are confused about which business designation works best for your company, we highly suggest speaking with your lawyer or tax accountant to make an informed decision that will benefit you the most.
Also, note that you must dissolve and re-form an LLC in some states if there is any change in ownership. If that is the case, your lawyer may be able to direct you towards the best state for your LLC.
#5 File a Tax Form
As we said above, once there is more than a single member to your LLC, you will no longer be able to just use your social security number for your taxes; you will have to obtain a federal employer identification number (EIN).
As we said in Step #4, you may need to change your business’s designation with the addition of a new partner.
Depending on what you choose will determine the forms that you need to submit to the IRS. Your tax accountant can advise you on what documents you will need to complete based on your decisions and new designation if there is one at all.
#6 Register a Name Change
Lastly, if you have to change your business name, you will need to register it.
Unfortunately, changing your business name is a marketing nightmare that we wouldn’t recommend unless absolutely necessary.
However, if your new partner demands a name change in order for them to join the company, you will just have to deal with it.
On the legal side of things, you will need to notify the IRS and your secretary of state of this change, apply for a new EIN, and update all of your documents, licenses, and permits.
Please see your Secretary of State’s website for their regulations.
New Member Added!
Congratulations on the addition of a new member to your LLC; may it be a fruitful partnership that elevates the success of your business.
We hope that this six-step process of reviewing your operating agreement, setting the terms, voting & amending your operating agreement, updating your official forms, filing a tax form, and registering a name change will streamline your process for adding a new member to your LLC.
If you have any questions or want to update us on your progress, we would love to hear from you! We want to thank you for reading this article and ask you to share it if you think it helped you.
by Luke Iovino