How to Add a Member to an LLC

As your limited liability company (LLC) grows, there may come a time when you wish to add a new owner, also known as a member. For example, an investor may want a share, or you can take on a partner to help you run the business.  

Whatever the case, if you’re operating as a single-member LLC, the new member addition will turn your business into a multi-member LLC. You must know how to add a member and the implications of changing your business structure. 

Fortunately, all the information you need is detailed in this handy guide.

The Operating Agreement

Hopefully, you have an operating agreement in place. If you do and it was drafted correctly, it should specify the process for adding a member. Suppose your LLC currently has more than one member, and you’re adding another member; this is particularly important because it should specify how the addition of a member is voted for and agreed upon in the operating agreement. 

Once the procedures in the operating agreement are followed, you should draft a resolution to amend the operating agreement. Hopefully, all members, old and new, agree with the new ownership shares and profit distributions. 

If you do not have an operating agreement, you’ll need to follow your state’s laws to add a member. It may involve drafting an operating agreement from scratch and including the approved ownership percentages and other provisions. In some states, however, you may be required to dissolve the LLC and form a new one. 

It would be best to involve an attorney to avoid future disputes and issues. 

Articles of Organization

In some states, you may be required to amend your LLC’s articles of organization. Every state’s articles of organization are different; some require all member information to be included, while some do not. Therefore, you may need to file an amendment of the articles with your state. Generally, a small fee is involved.

Taxes

Suppose your business has been a single-member LLC using your Social Security number for tax purposes. You’ll need to get an employer identification number (EIN) when you add a member. 

The Internal Revenue Service (IRS) uses your business’ EIN to identify your company, much like a Social Security number is used to identify individuals. An EIN is mainly for tax filing purposes. 

The application is Form SS-4, and you can submit it via the IRS website. You can print the form, fax it, or mail it. If you apply online, your EIN will be issued immediately.

Once you become a multi-member LLC, you’ll be taxed as a partnership by default. Income will pass through to all members in amounts based on their ownership percentages and reported on their tax returns. 

Implications of Adding a Member to Your LLC

The biggest consequence of adding a member to your LLC will be the reduction of your ownership stake. As a result, you will own less of the company and receive a smaller profit distribution, and if the company is ever sold or required, you’ll receive less of the proceeds.

If your LLC is member-managed, you and the new member will manage operations; you’ll have less control than before. Decisions will have to be made together and sometimes voted upon based on the operating agreement’s provisions. 

Finally, removing a member is not easy if the new membership structure does not work out or if you and the new member need help to reach an agreement. You’ll need to follow the provisions of your operating agreement, and if there is a dispute, you may end up in court. 

In Closing

Adding a new LLC member can be complex, but hopefully, your business has an operating agreement to guide you through the process. Either way, it’s highly recommended that you have an attorney involved when adding a member to your LLC so that everything is done correctly and your rights, and the rights of the new member, are protected.