Do you have an LLC and want to add a new member or partner to grow your business? Making it official doesn’t have to be a headache if you know what steps to take. Read on for all the details!
Today, I want to discuss something many business owners have been doing lately–adding a new member to an LLC. I know, it’s a big step! Running an LLC solo can be limiting when your business starts expanding. You might need fresh skills, resources, or someone who just vibes with your vision to scale things up.
So, imagine you meet someone who’s stoked about your company and could bring big assets to the table. You click instantly–their ideas and enthusiasm are on point. Do you bring them on as an official member? (That would mean they’re an owner, too.)
Well, if it’s the right fit…why not? (As long as you’ve considered the pros and cons to giving up some ownership of your business, of course. Talk to your own lawyer before ever adding a new member to your LLC.)
LLCs offer several benefits, including tax advantages and limited personal liability protection. Little wonder owners of sole proprietorships or partnerships often switch to LLCs to shield their personal assets!
The best part? You’re not stuck forever with your first LLC structure. As things evolve, you can modify ownership, like adding new members. The possibilities are wide open!
Still, there are still rules to follow when admitting new members so it sticks legally. So before you draft up those partnership agreements, let’s cover how to legally add members to your LLC to avoid chaos later.
I’ll summarize exactly what to do to onboard new talent seamlessly, take your company to the next level, and protect all members’ interests!
How To Add A Member To An LLC
Adding a member to your LLC can be a smart move when you find that perfect partner who shares your vision. At the same time, it’s natural to have questions about the steps involved. LLC membership is flexible, but there are still guidelines to follow for a smooth transition.
Below are actionable steps to follow to go about it seamlessly:
Step 1: Evaluate all business ramifications.
Right now, it’s just you running the show. So, bringing someone on would probably happen faster than if you had multiple members already. Remember that adding a new member means that you’re no longer the sole owner of your company. You’d likely be giving up some equity in your company in exchange for a time, money, or expertise investment. But if you already have other members to your LLC, there can be no qualms–everyone’s got to come together and give the thumbs up before a new person can join.
Here’s what you should be asking yourself as you consider this new opportunity:
- What is this LLC member’s role in taking your business to the next level? Are they adding expertise, cash, or time?
- Are your personalities compatible? Or would you knock heads and bicker over everything?
- Are they going to take the business to the next level? Or just take up space and money? You want to grow, not plateau!
- Will you value their input? Or will they complicate things and override your vision? Collaboration is great, but having a common goal is greater, right?
- What would their role be day-to-day? Are they more of a silent partner just investing funds? You probably need an active contributor, not a ghost member!
If your gut says they’d be a good fit and you’d soar together, then you’re ready to have the convo! But if alarms are going off, you’ve got to listen to your intuition and rethink this!
Step 2: Clarify your LLC’s operating agreement.
Next, dig out and review your operating agreement and give it a good read-through. See what it says about bringing on new members. Following that process shows you’re running your LLC properly and playing by your own rules.
Now, if you don’t have an operating agreement yet, listen up. You’ll need to follow your state’s default LLC laws regarding the addition of a new member. And in some states, any change in ownership means dissolving your old LLC and starting a new one.
If you’re missing that crucial operating agreement or any other important legal document, now is the time to get one. If you’re going to add a member to your LLC, you should consult an attorney to have a legitimate operating agreement drafted for your company. You and the new member will likely want to have your own, separate counsel so that you can be advised on all of the pros and cons to negotiating your operating agreement.
This is crucial, especially if you want to build a team; it’s key to laying out everyone’s rights, responsibilities, shares, profits, losses, voting powers, and the works. It is way easier and cheaper to decide the operating rules upfront instead of trying to resolve issues down the road! Trust me, I used to handle these types of cases all the time.
Step 3: Specify conditions for sharing profits.
Usually, when a new member joins, they make a “capital contribution”- either money, property, skills, or services that will help you expand in new ways. Whatever they bring to the table, you’ll need to decide on profit-sharing terms and percentages that reflect ownership stakes.
I’m sure you’ve heard of 51/49 splits before–that gives one partner controlling decision power. LLCs use percentages like that to divide up profits, losses, ownership interests, and all.
And the cool thing is you can adjust the percentages later if needed! When initially bringing someone on board, a 51/49 or 50/50 split may make sense to define involvement and profit shares. Or, you may need something totally custom based on their specific contribution. However, I’d recommend speaking with your own attorney before ever agreeing to a 50/50 split with a new member because it can be very difficult to ever reach a decision in your company with a 50/50 split.
There’s a lot to think through, but hashing out the legal side upfront using the Ultimate Bundle™ will help avoid issues later on. You want to make sure your new member feels like an equal partner in this biz!
Step 4: Vote on it.
The next step is prepping an official amendment to make them part of the crew! This amendment should include the new member’s name, ownership percentage, what they’re contributing, and their share of profits/losses.
Then, you’ve got to hold a vote to approve the amendment, following the process in your operating agreement or state law. Existing LLC members can’t be forced to reduce their share for a newbie without mutual agreement–so those operating rules matter!
If you don’t have an agreement yet, voting has to follow your state’s LLC law. Usually, unanimous consensus is required—easy for single-member LLCs like yours! However the vote happens, document it in the meeting minutes or a resolution. Finally, have all members, including the new one, sign the amendment.
Step 5: Update your articles of organization.
The big vote happened, and the verdict is in–time to make your new member officially official by amending your Articles of Organization.
Now is also a good time to decide if you want your LLC to be member-managed or manager-managed moving forward.
I know some states don’t require the amendment since their Articles don’t list members. If you’re unsure, reach out to your Secretary of State or business filing department. You can also contact me and we can discuss the answers to all your burning questions!
Once you file those amended Articles, there’s just one tiny step left before your new partner is 100% legit.
Step 6: Settle tax obligations.
We’re in the home stretch! If you’ve been a single-member LLC using your social security number as the tax ID, now’s the time to get an official employer identification number (EIN) from the IRS. This is now essential since you’ll have multiple members. Luckily, their website lets you grab one for free–easy peasy!
One more thing to check–if your LLC has been taxed as a partnership or sole proprietorship so far and you want to switch to being taxed as a corporation now, extra IRS paperwork like IRS Form 8832 will be needed.
How can you nail down the best tax plan for your unique situation? Can you use one LLC for multiple businesses? Do you need an LLC for online business? How long does it take to get an LLC? All these questions can be put to rest when you utilize the Ultimate Bundle™; my compendium of priceless tools that have simplified legal implications for several business owners and I love for YOU to be next!
Implications Of Adding A Member To An LLC
I know you must have already thought long and hard about tying your company’s future to this person. But I’ve got to ask again–have you contemplated exactly what this means?
Below are the impacts that adding a new partner may have on your LLC and things to watch out for:
You need to know that adding a new member is going to impact your taxes for the LLC. Your returns will show the new business structure and how you’re dividing up profits. Spreading those profits around could temporarily lower all your tax bills—something important to walk through with your advisor.
But there’s a key point to consider: bringing on certain members might prevent you from having an S-corp status, which has its own tax advantages too. So, before moving forward, you definitely need to consult an expert to understand all the tax implications.
When bringing on a new LLC member, they’ll need to make a capital contribution to get ownership of the company. This could be cash, assets, future “sweat equity,” or a combo.
However, the percentage each member gets isn’t always directly tied to the amount contributed. It’s typically negotiated between members. Your LLC operating agreement will outline each person’s contribution and ownership percentage.
You can also include a capital call provision if desired. This allows requiring additional contributions in the future to support growth plans–like covering increased costs or funding an acquisition.
Handling of Operations
Since your LLC is going from just you to multiple members, you’ve got an important decision to make. Will you and other members be handling the daily operations yourselves? Or should you bring on a third-party manager instead?
If members are running things, then you’ll be a member-managed LLC. But if you hire an outside manager, it becomes manager-managed. When making the switch, this structure must be laid out in your operating agreement and official state paperwork.
It’s also smart for you to look at everyone’s strengths and availability for handling the workflow.
Potential Dissolution Agreement
Even though it’s not desired, your operating agreement should address the possible dissolution of the LLC. This includes who can decide to dissolve, acceptable reasons, and how it will go down.
Usually, the members decide jointly, but courts can mandate dissolution too (called judicial dissolution). Other events like selling assets or reincorporating elsewhere could also trigger dissolution.
The agreement acts as a roadmap for actually winding down operations–settling debts, dealing with assets, closing up shop, and so on. Management or their designees typically handle these tasks.
Adjustment of Business Agreement
Since your solo LLC is getting a new member, that means switching from a single to a multi-member LLC. So, your operating agreement definitely needs some updates to fit the new structure.
Even if you have existing members already, you’ll likely need to tweak things like profit allocations, voting rights, duties, etc., to factor in the addition. Hence, why you need to work with a legal or biz pro to properly amend the agreement. Then, have all members sign the new version and keep it on file.
Also, if your state requires filing the operating agreement, be sure to submit the updated copy to stay compliant.
You get to determine what “success” means and looks like to you!
I’m so excited for you and this new chapter with your business! Adding a new member to your LLC is such a big deal. You should be so proud of how far you’ve come.
I know there’s a lot of complicated legal stuff that goes into making it official. Ugh, paperwork right?
Not to worry, I got you!
We’ll tackle all those biz docs and legal formalities together. I’ll help make sure you check all the right boxes so your new member becomes legit instantly. And I won’t stop there; I’ll equally provide help with everything your business needs besides an LLC!
And think of everything you have to look forward to…More energy, more ideas, more support for your blossoming company. You’re building your empire, one member at a time!
Next Step: Watch my free legal workshop
If you’re ready to legally protect your business and have the legal knowledge watch my free workshop ‘5 Steps to Legally Protect & Grow Your Online Business’ right now by saving your seat here.
Shoot for the moon. Even if you miss it you will land among the stars.