In business, it’s often the inability to scale that holds us back. It could be a lack of resources, skills, or a partner that shares a belief in your vision.
After you’ve registered your LLC, started to operate, and finally stabilized and managed your business, you’re entering the next stage in running an LLC.
Eventually, most LLCs need to expand, which brings us to the question, “Can I add members to my LLC?”
The answer’s yes. But first, you need to know the rules.
For example, adding a member to a multi-member LLC could require some modification to your operating agreement, the consent of other members, and notices to the IRS and your state.
A single-member LLC is more manageable since there’s no voting, but you still have tax compliance and possible amendments to your articles of organization to consider.
With all of this in mind, let’s look at how you can add a new member to your LLC.
Members are the individuals or entities who co-own and have a set percentage of an LLC.
Members can manage the business or play a silent role, receive profits and losses, inspect company records, keep voting rights, and decide how to run the business.
There are several reasons you should add a new member to your LLC.
However, be aware that while new members are often helpful, they also diminish any percentage of profits and have a say in running your business.
Adding a member to your LLC isn’t rocket science. Still, you need to know which steps to take to ensure it’s a smooth process and follow your operating agreement and state laws.
Your aim when adding a member is to make sure you adhere to any formal procedures that maintain the legal protection of a designated entity and avoid internal disputes among the original owners.
You don’t need an operating agreement to form an LLC, but if you have one, you must review and amend it when you add a new member.
An operating agreement outlines an LLC’s procedure when adding a new member as drawn up by the original owners. You should review it to ensure you follow those procedures.
Amending the operating agreement requires adding the new member’s name, financial contribution, position and duties within the business, and percentage of share ownership.
LLCs that don’t have an operating agreement must follow their state laws when adding a new member to the business.
State laws and procedures vary. Some don’t require you to report a membership change, while others need you to add your new member to your article of organization. In that case, you’d have to complete and file an article of organization amendment form.
You can find your state requirements by visiting your secretary of state’s website.
Single-member LLCs rarely have operating agreements since there’s only one member. If that applies to you, you can either follow your state laws or take the more advisable option and create an operating agreement before adding a new member.
With your operating agreement in place, your next step is to record your new member and file any documents your state might require (more on those in just a moment).
The beauty of a single-owner LLC is there’s no voting required when you add a new member.
But there could be specific formalities and tax considerations that will need your attention. Let’s look at those next:
Single-member LLC owners who use their social security number (SSN) as their federal tax number must get an employee identification number (EIN) when converting to a multi-member LLC.
You can get your EIN for free from the IRS website, or if you don’t want to deal with the paperwork, you could use our EIN service here at Tailor Brands.
Single-member LLCs pay tax as sole proprietors; when you add a new member, you must change your tax status to either a partnership or a corporation.
To pay tax as a corporation, you must file specific forms with the IRS and elect corporate status.
Consult with a tax accountant or lawyer to understand the tax implications of adding a new member to your LLC to avail of the optimum tax status.
Any LLC without an operating agreement must follow their home state’s (where you formed your business) laws to add a new member and submit any official documents that might need amending.
Your state might require you to amend your articles of organization or, in rare circumstances, dissolve and reform your LLC. You can check your Secretary of State’s website to find more information.
Once you add a member to your LLC, it becomes a partnership for tax purposes.
Multi-member and single-member LLCs are both disregarded entities. So, the profits, losses, and taxes flow through to the owners. However, as there will be 2 owners, you must file Form 8832 and inform the IRS that your business should now pay tax as a partnership.
Adding a new member to a multi-member LLC is more complicated than a single-member LLC. For example, existing owners must vote unanimously before a new member can join.
When adding a new member to your multi-member LLC, the main consideration is that current members vote for the terms and conditions under which that member will join.
For instance, everyone must agree on the new member’s percentage share, duties, and distribution of any profits and losses.
LLCs are flexible, though, and you can add a new member by a simple majority vote and determine their ownership interests to be more or less than existing members.
Once all members agree, your next step is to amend the original operating agreement to include the new member, their percentage ownership, duties, etc.
You can choose what kind of member LLC to use when adding a new member.
For example, your LLC could become a multi-member partnership with both owners taking on an equal share of the duties or opt for a member-managed or a manager-managed LLC.
Let’s check out what those mean:
Your multi-member LLC can take several forms; for instance, your new member can be active or silent.
Active members bring a skill set to an LLC that was lacking before their arrival, making them an essential ingredient in your LLC recipe. Whereas silent partners invest in obtaining a percentage of the LLC profits and take no part in the daily duties, they still have voting rights and a say in running your business.
Whichever you choose, you must outline and agree upon it in your operating agreement.
A member-managed LLC is a simple system where members have an equal share of ownership and responsibilities and fulfill roles that suit their skill sets.
You could, however, choose to run a manager-managed LLC where you employ a manager to look after daily operations.
Depending on your LLC needs, your manager could be a member or non-member. For owners who wish to take a more passive role but keep 100% of the shares, a non-member manager-managed LLC is an excellent option.
As states don’t require you to submit an operating agreement, you could amend it without filing any changes with your state office. However, some states allow you to submit and file your operating agreement. If you do, you’ll have to submit your amendment upon adding your new member to your LLC.
An article of organization is a legal requirement, so you must file any amendments with your secretary of state’s office.
You can check with your secretary of state’s office to find the fees, what to include, and if you can make amendments online or if they require paper forms.
States don’t always include a certified copy of your amended “article of organization,” so you might have to pay an extra fee to get one to keep a copy with your registered agent.
Unless registered as a corporation, multi-member LLCs should already have an EIN.
You must notify the IRS of any additional new members. While designated entities (taxed as partnerships and sole proprietorships) keep the same tax structure, an additional member changes the business’s profit distribution and tax liabilities.
Adding a member to your LLC is an exciting time and a reason to celebrate.
Follow these steps and it should be a smooth transition—one that helps your business scale and achieve its potential.
If you’re unsure at any stage, contact a lawyer or tax accountant for further advice.
Good luck!
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos.
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