How to Add a Member to an LLC (Step-by-Step Guide)

A Quick Overview of Adding a Member to an LLC

Before diving into the details, here is a high-level overview of the key steps involved in adding a member to your LLC:

• Consider the implications and ensure it’s the right move for your business. Understand how it will impact operations, finances, ownership dynamics, etc.
• Review your operating agreement to understand the process for adding members. If you don’t have one, consult your state’s default rules.
• Decide on the new member’s capital contribution, ownership percentage, distribution of profits/losses, and voting rights.
• Draft and vote to approve an amendment to the operating agreement admitting the new member.
• If required, file an amendment to your Articles of Organization with the Secretary of State.
• Obtain an EIN if moving from a single to multi-member LLC.
• Handle any changes in tax status resulting from the addition.
• Update company ownership, management, and administrative records.

The Basics of LLCs

A limited liability company (LLC) is a type of business structure that combines aspects of partnerships and corporations. LLCs provide liability protection for owners while allowing flexibility in management and tax treatment.

Key LLC characteristics:

• Limited liability – Owners’ personal assets are protected from business debts and liabilities.
• Pass-through taxation – Profits/losses pass through to owners’ personal tax returns.
• Flexible management – Can be member-managed or manager-managed.
• Ownership flexibility – Ownership stakes can be customized.
• Less paperwork – Less burdensome compliance requirements than a corporation.

LLCs make it easy to run a small business and protect personal assets. Adding members changes the dynamics, so understanding consequences is key.

Evaluating the Impact of a New Member

When considering adding a member to your LLC, you need to carefully evaluate the potential consequences, both positive and negative, across all aspects of your business:

• Financial impact – How will profits, losses, and capital be affected? Will it improve cash flow?
• Tax considerations – Will your IRS filing status change? Will taxes become more complex?
• Management changes – Will the new member want decision-making authority? Are you willing to give up control?
• Business operations – Does the member add beneficial expertise or resources? Or disrupt operations?
• Interpersonal dynamics – Is your relationship strong enough to handle potential disputes down the road?
• Future exit strategy – How difficult would it be to buy out or remove the member if needed?

Take time to thoroughly understand the short and long term pros and cons of adding the new member before moving forward. Consider consulting legal and tax advisors as part of your evaluation process.

Submitting Required IRS Paperwork (If Required)

If admitting a new member takes your LLC from single-member to multi-member, you may need to change how your business is taxed and file documentation with the IRS.

By default, multi-member LLCs are taxed as partnerships while single-member LLCs are disregarded entities. So your LLC may need to change from filing Schedule C to filing Form 1065.

To inform the IRS of an entity classification change, you must file Form 8832. This paperwork should be completed as soon as possible after adding the new member to your LLC.

Additionally, single-member LLCs using the owner’s SSN must now get their own EIN and use it on required tax filings after adding a member.

Consult a tax professional to ensure you handle any IRS paperwork correctly and on time after admitting a new member. Doing so avoids penalties and keeps your LLC compliant.

Let’s explore each of these steps in more detail.

Step 1: Consider the Implications of Adding a New Member

Before initiating the process of adding a new member to your LLC, carefully consider why you want to add this person and how it will impact your business.

Bringing on another owner means taking on a business partner. So you’ll want to think through questions like:

• What value will this person add? Do they bring needed expertise, operating experience, key relationships, or growth capital?
• How will it impact finances? Their capital contribution will affect ownership stakes. And profits/losses will be split differently.
• How will it impact control? Will this person want an equal/majority vote? Are you ok giving up some control?
• Is your operating agreement ready? Does it have clear processes for adding/removing members?
• How will it impact your tax situation? Moving from single to multi-member LLC affects taxes.
• Is your relationship strong? Adding in business partners can strain personal relationships if there is disagreement.

If the positives seem to outweigh the negatives, then moving forward may make good sense for your LLC. But don’t underestimate the implications of having a new co-owner of your business.

Step 2: Review Your Operating Agreement

Your LLC operating agreement provides the rules and processes for your business, including the admission of new members. So your next step is to review this document.

For single-member LLCs, the operating agreement simply needs to be updated to admit the new co-owner once they are added. It’s a straightforward process.

For multi-member LLCs, most operating agreements require a unanimous approval vote of all existing members before a new member can be admitted. The operating agreement spells out the voting procedures.

If your operating agreement doesn’t address adding new members, then you’ll need to follow your state’s default rules provided in the LLC Act. Usually this also requires unanimous consent of existing members.

So carefully review your operating agreement to understand the required procedures for admitting new co-owners. If you don’t yet have an operating agreement, work with an attorney to put one in place before adding members.

Step 3: Decide on the New Member’s Specifics

There are a few key specifics that need to be decided and documented when adding a member:

• Capital contribution – How much is the new member contributing as their investment in the business? What form will this take (cash, property, services performed)?
• Ownership percentage – What percent share of total ownership will the new member have? How does this dilute/affect current member shares?
• Distribution of profits/losses – How will net business profits and losses be allocated to the new member annually? Based on ownership, or a special arrangement?
• Voting rights – Will the new member have equivalent voting rights and powers as current members?
• Buyout provisions – Under what circumstances can the new member be bought out or removed? What about exiting voluntarily?

Work through the details above with the prospective new member. Everything should be spelled out clearly in the operating agreement amendment.

Step 4: Draft and Vote on an Amendment to the Operating Agreement

Once terms are agreed upon, it’s time to make it official by drafting and approving an operating agreement amendment to admit the new member.

This amendment should include:

• Name and identifying details of the new member
• Capital contribution amount
• Ownership percentage
• Distribution of profits/losses
• Voting rights
• Any special provisions agreed upon

The amendment must be approved following the procedures laid out in your original operating agreement (usually a unanimous vote of members is required).

Be sure to document the member approval properly with meeting minutes, a resolution, or consent form signed by all members. Consult an attorney to ensure it’s done correctly.

Step 5: File Amendment to Articles of Organization (If Required)

For most states, adding a member does not require you to amend your Articles of Organization (formation documents originally filed for your LLC).

However, a few states, like California, do require filing an amendment with the Secretary of State to admit new members. Check with your state to see if this applies to you.

If required, file the Articles of Amendment paperwork and pay any filing fees (typically under $100). This makes the member addition part of your company’s official state records.

Step 6: Obtain an EIN if Moving from Single to Multi-Member LLC

Single-member LLCs can operate under the owner’s SSN for tax purposes. But multi-member LLCs must obtain their own EIN from the IRS.

So if your admission of a new member takes you from solo owner to having multiple members, you’ll need to get an Employer ID Number.

You can easily apply for an EIN online from the IRS – it’s free and just takes a few minutes.

Going forward, you’ll use your LLC’s EIN for filing taxes and on other documents.

Step 7: Handle Any Changes in Your Tax Situation

When adding a member takes your LLC from single to multi-member, it can impact your tax status and how you file.

By default, multi-member LLCs are taxed as partnerships, while single-member LLCs are disregarded entities. So your tax situation may change.

Work with an accountant or advisor to understand how admitting a new member impacts your tax status and filings. You may need to switch from filing a Schedule C to filing Form 1065 partnership taxes.

And the new member’s capital contribution becomes taxable income for the current owner(s). Plan for this tax liability.

Step 8: Update Ownership & Administrative Records

The final step is to update any company ownership, management, or administrative records and documentation to reflect admission of your new member.

Key items to update include:

• Capital and equity records – Update LLC ownership ledgers and equity accounts.
• Member meeting minutes – Record key decisions and votes related to the new member.
• Bank accounts – Add new member as authorized signer on company bank accounts.
• Company agreements & contracts – Update any vendor agreements, client contracts, or financing agreements to reflect new owner.
• Licenses, registrations, permits – If required, add new member’s name to business license applications and other regulatory docs.

Following proper procedures and documentation guidelines protects all members and maintains your LLC’s validity. So be thorough in updating records.

Conclusion

Adding an additional co-owner to your LLC can be a smart growth move – bringing fresh capital, skills, experiences, and momentum to your business.

But admitting new members significantly impacts finances, taxes, decision-making, and interpersonal dynamics for your existing LLC members.

So take the process seriously and take care to add members intentionally, legally, and cooperatively. Follow the proper steps outlined above for a smooth transition.

With upfront planning and communication, you can successfully blend an incoming member into your LLC and move forward in building the business together.