Adding new members and removing existing members from an LLC is an inevitable process, and as an LLC owner, you should understand the legal steps involved in this process. In this guide, I’ll take you through the procedure and what you should consider when adding a new member into an LLC.
FIRST THING FIRST – OPERATING AGREEMENT OF YOUR LLC
Just like in almost every amendment that you want to make, you have to check with the operating agreement of your LLC. Unless you have a provision in the operating agreement about adding a new member, you won’t be able to add a new member. In that case, you would first have to amend your operating agreement, and then you can move forward with adding the new member.
Generally, operating agreements require a majority vote of existing members when there is a provision about adding a new member. Adding a member is a significant decision in the structure of LLCs, and it is the primary reason behind the requirement of a majority vote. However, you can design your operating agreement in any way you want, and you can create it in a way where there is no requirement of a majority vote for adding a new member.
SETTLE MEMBERSHIP TERMS
After your operating agreement allows a new member to be added, the next step you need to take is to settle the membership terms of the new member. You have to figure out the potential stake of the incoming member into your LLC. Every LLC member must have a capital interest in the LLC, and it could be via financial contribution, assets, or services.
Another critical factor of settling membership terms with a new member is to decide the new management structure. Some LLCs are member-managed, while managers manage others. You will have to determine the role of a new member in the management of an LLC.
UPDATE ARTICLES OF ORGANIZATION TO REFLECT CHANGES
After the new member has been added and all the membership terms have been agreed upon, you have to make it official by updating the articles of the organization of your LLC. New articles of the organization should reflect the new member’s name, financial contribution, and role.
All existing members of LLC should also approve and sign a new operating agreement. If you’re in a state that allows you to operate without an operating agreement, you may have to get unanimous approval from members of your LLC for this addition.
FILE TAXATION FORM
While LLCs having multiple members are generally considered partnerships by IRS, if you have opted to be taxed as a corporation, you would need to file form 8832. However, you need to determine the best taxation structure for your LLC by consulting with your accountant or attorney.
CHANGE THE NAME, IF APPLICABLE
Sometimes, adding a new member to your LLC could force your hand to change the name of the LLC. For example, if you have a two-member LLC, and it is named ”Syed & John TechZone LLC”, changing its name will make sense if you plan to add a third member. However, it is not a change required by law, and you could keep the name unchanged.
Now that we have outlined the steps that are required to add a new member into an LLC, we shall take a look into the consequences of adding a new member to your LLC and where you should be careful:
- ADDING A NEW MEMBER INTO A SINGLE MEMBER LLC
If you are operating a single-member LLC, and you decide to add a new member, it will change the structure of your LLC altogether. IRS considers a single-member LLC as a disregarded entity. When a new member is added to such an LLC, it will be regarded as a partnership by IRS for taxation purposes.
The taxation structure for a disregarded entity and a general partnership is entirely different. For example, a disregarded entity is not separate from its owner for federal income tax purposes. On the other hand, a block is taxed differently from the partners, as does a corporation.
It is why, before you decide to add a new member into your single-member LLC, you should weigh all your options. Only after you understand the taxation consequences perfectly well you should go ahead with adding a new member to an LLC.ADDING A NEW MEMBER INTO A MULTI-MEMBER LLC.
- ADDING A NEW MEMBER INTO A MULTI-MEMBER LLC
Adding a new member into a multi-member LLC requires more consideration than a single-member LLC. It is essential to make sure that the rights of existing members are not infringed when you are adding a new member into an LLC. Furthermore, in a multi-membered LLC, when it is member-managed, the roles of each member are defined in the operating agreement, and when you add a new member into it, you will need to specify the part of a new member.
Any changes you make in a multi-membered LLC regarding members should also be reported to the secretary of state office via the updated draft of articles of organization. The consensus of existing members in adding a new member is paramount, as their percentage of capital contribution and profits will change significantly.
Frequently Asked Questions:
In this section, we will take a look into the frequently asked questions about adding new members into an LLC and its consequences:
HOW MUCH DOES IT COST TO ADD A MEMBER TO AN LLC?
The fees for filing for an addition of a new member into your LLC usually revolves around $100, but it varies from state to state. You can have an exact figure from the secretary of the state office of your state.
DO I NEED A NEW EIN IF I ADD A MEMBER TO MY LLC?
Usually, when the ownership or management structure changes, it is required to apply for a new EIN. However, if you have a multi-member LLC and add a new member, there is no legal requirement to get a new EIN for your LLC.
HOW CAN I ADD A NEW MEMBER INTO AN LLC WITH NO OPERATING AGREEMENT?
Generally, for LLCs in states that don’t require an operating agreement, you can add a new member into your LLC with a legal document approved and signed by all the existing members of your LLC.
DO ALL MEMBERS OF AN LLC HAVE TO SIGN FOR THE CHANGES IN THE OPERATING AGREEMENT?
Since every member shares an equal interest in the operations of an LLC, any significant changes in the operating agreement of an LLC require the approval of all members of the LLC. It is the same for adding a new member into an LLC, which can’t go ahead unless all the existing members approve the updated operating agreement of the LLC that reflects the addition of a new LLC.
HOW DOES A MEMBER LEAVE AN LLC?
A member of an LLC can leave an LLC by voluntarily withdrawing their interest from the LLC or transferring it to another person or entity. Members can’t simply leave the LLC on a whim, and there are specific procedures outlined in the law to follow.