How to Add a Member to an LLC

This is all you need to know about the procedure, legalities and the state requirements.

When you have completed the establishment of your partnership, ensure that you have reviewed your operating agreement

Your LLC is a rulebook that is internal to you. Provided it is drafted correctly, it ought to describe:

• How new members are admitted
• Minority or unanimous voting requirements.
• Percentages of ownership and profit-sharing regulations.

In the case of an operating agreement:

• take the procedures as indicated.
• Prepare a resolution/ amendment to incorporate the new member.
• Make sure that all the existing members are on board.

In case you do not have an operating agreement:

• Adhere to the state default LLC regulations.
• You might have to make an operating agreement.
• Some states also may even need a new LLC with the addition of a member without an agreement.

Step 2: Make Amendments to the Operating Agreement

No matter what the state may demand, it is a good practice to update your operating agreement by adding:

• Name and contacts of the new member.
• Capital contribution
• Ownership percentage
• Suffrage and control of management.
• Profit-sharing allocation

Ensure that the new and existing members sign the new agreement.

Step 3: Revise Your Articles of Organization (where necessary)

There are states that demand a filing of an amendment of the Articles of Organization:

• States such as Alabama, Arkansas, Florida, Georgia, Hawaii, Illinois, Missouri, among others, have a filing fee that involves filing forms to the Secretary of state.
• Other states such as California, Colorado, Delaware, Texas, and Wisconsin do not need a state filing; one just updates internal records.

It depends on the state- in most instances, it costs between 10 and 100.

Step 4: Revise Tax and IRS Records

By the addition of a member, your tax classification may vary:

• Single-member LLC to Multi-member LLC: IRS is defaulted to regard it as a partnership.
• It may require you to have a new Employer Identification Number (EIN) (Form SS-4).
• In case your LLC was operating on your Social Security number before, then the EIN is now mandatory in filing all tax documents.
• Report any modifications and also submit form 8832 in case options of a certain type of tax treatment are chosen.
• The percentage on which self-employment, profit allocations will be done is now established on basis of ownership.

Step 5: It is imperative to grasp the Implications

The consequences of adding a member are high:

• Dilution of ownership: Your share of ownership is diluted, or, in other words, there are less shares of profit.
• Shared Management: It is now co-operative in making decisions in the member-managed LLCs and major decisions may have to be voted on.
• Member Removal: Removal of a member is not simple in case of any conflicts, go through operating agreement or legal process.
• Legal and Tax Liability: Multi-member LLCs are taxed as partnerships by default which impacts on filings and distributions.

Step 6: Overview of State by State Filing

The process of adding members in various states is simplified as follows:

Step 7: Final Steps

• Issue the membership certificates (where applicable)
• Renew the bank accounts, licenses and contracts with the new member.
• Keep all amendments and approvals of the same.

Key Takeaways

• The operating agreement is the first thing to start with; it controls the process.
• Depending on the state, filing requirements may be amendments to the Articles of Organization or not.
• Being added is a matter of change of ownership, management and tax status, so think twice.
• It is advisable to have legal representation to avoid conflicts and help to adhere to the rules.