Adding A Member To An LLC: Step By Step Guide 2023
An LLC, or Limited Liability Corporation, is a type of business organization. This organizational style offers some protections to the business operator while still remaining simplified enough to make changes at a later date. Some of the protections offered to members are the legal protection and separation of personal assets from business assets, pass-through taxation through a separate entity, and no limitations on shareholders. An LLC can be formed as a single-member LLC or a multi-member LLC. Entities can add a new member to an LLC when needed. LLC’s also allow for members to sell, for a member to pass on their portion of the business in cases of death or disability, and for all owners to sell. In this article, you’ll learn how to add LLC members to your organization’s operating agreement in a few simple steps.
Read More: Best Registered Agent Services 2023
Adding a Business Partner to an LLC: Pros & Cons
Each LLC is formed according to the regulations of the state of incorporation. Like a sole proprietor, a single-member LLC can use the member’s social security number as an identifier. In addition to this paperwork, the business owner should set up an operating agreement. This document is used to identify how the business will make financial decisions, how it will function, and how current members can be added, removed, or change their membership stake. Remember, when you add members the current members will also be affected.
Members of a member-managed LLC do not have to be U.S. citizens but all must be active in the business. A manager-managed LLC allows for more passive members and investments. For tax purposes, the multi-member LLC can be taxed as an S Corp or C Corp. Some reasons to add a new member to an LLC include:
- For investment purposes – a new member will buy into the business, bringing with them an influx of cash that can be used to expand
- To reward a loyal employee with additional business benefits
- To reduce the strain on a single member
However, adding a new member to an LLC also has drawbacks. These include:
- Change in tax status – as a single member, you pay taxes as a Sole Proprietorship; with members, you’ll be taxed according to how you elect corporate status
- Lowered profit percentages
- Difficulty in removing a member once they are added
Adding Members To An LLC: Step-by-Step Guide
Adding an LLC member is a big step for any business. It is a sign that the business is healthy and growing. A new business member will add capital to a business and can be offered as a reward for loyal employees. Here’s how to add a member to your LLC in five simple steps.
Examine Operating Agreement & State Laws
The first step is to examine the existing operating agreement. This agreement outlines all LLC member information including the process for adding a new member and includes how those members will be allotted voting rights and how members are to act as arms of the business. If the operating agreement did not originally include an option for adding a member, contact a business attorney to have this added. Each LLC makes its own rules for operation.
Terms & Profit Shares
Next, determining the specific actions, benefits, and new ownership structure after the addition of the new member or members. You must decide the new ownership percentages, and any voting rights for the new members, decide upon any changes to the business structure, and what the capital contributions for the new member or members should be.
Take It to a Vote
Next, all existing members will vote on whether or not to add members to the business. Remember, that the new member will mean a reduction in profits for all existing members and will change the dynamics of the original ownership structure. These changes may be good for the business, but they also may lead to added stress for members. Also, when you add a new member, it may change your tax structure and bracket; these changes should also be carefully considered. When voting, the members will decide what voting rights the new member has, what their managerial responsibilities are, and what their ownership percentage will be. Any changes must be decided by a majority vote.
Update LLC Articles of Organization
Next, you will update the management structure for the business entity. In some cases a freelance writer can help you create or update the paperwork, this is just a matter of experience. When formed, the business management structure within the articles of organization may have only accounted for the number of members at creation. This business operations agreement will need to be amended, along with the provision of voting rights, ownership interest, and any changes to how members can be added or removed in the future and how membership can be transferred.
File Tax Documents
The final step is to file new tax documents, including the Entity Classification Election form, with the Internal Revenue Service or government agency and with the state of incorporation. Additional forms are available on the IRS website. Some states may require a new Federal Tax Identification Number, specifically if the LLC was originally a single member but is not changing to allow multiple members. For a single member, the LLC’s tax number can be the individual’s social security number, but for multi-members, it cannot. There may be tax consequences for changing to a multi-member LLC; a tax accountant may be able to help you better understand the tax implications and the best tax status for the LLC.
Once all paperwork is amended and updated, you will submit these to your Secretary of State.
Changing a Single into a Multi Member LLC
Adding a business partner to your business can be a simple process. You will follow the same steps. First, you’ll review your operating agreement to make the appropriate changes for any new members, how new members will affect existing members, and what the capital contribution for any new members will be. After making any amendments to the articles of organization, you will vote to accept or reject the new member, file any amended operating agreement with the state agency, file new tax documents, including any changes to the federal employer identification number, and notify the Secretary of State or your state’s business filings agency.
The Top 2 Limited Liability Company Services
|Northwest Registered Agent||Zenbusiness|
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Northwest Registered Agent
Northwest’s suite of tools offers business services at a reasonable price. The main difference between Northwest and similar entities is that Northwest only offers one paid plan for services. The initial cost is $39 to file the LLC paperwork; all other charges are due as per state law. There is a separate option, called Pay In Full. With this option, which costs $225, Northwest will file the LLC, and provide agent services for one year, however, all other charges from state fees, etc., will still apply.
Northwest also has a strict no-data-selling policy and will provide pricing changes in advance. Northwest also offers the ability to pay by the month, with an auto-renew option.
- For $39, Northwest’s services will help you form your LLC within a month, including annual compliance with your state’s LLC act
- Northwest also includes stand-alone services including compliance filing, EIN filing an S Corp business filings
- Affordable legal services
Zenbusness is a one-stop shop for small business preparation. Through Zenbusiness you can search for available business names, create articles of incorporation, find out the needed documentation for your state and federal filings and registrations, obtain an EIN, and build the business’s web presence through domain names, email, and domain privacy protection.
Zenbusiness offers three tiers of members.
- For $0(Starter Plan), you can form your business within 3 to 4 weeks, file LLC paperwork, get an annual compliance service, search for business names, have phone/email support, and have online document access. The Starter Plan does not automatically renew each year.
- For $199 (Pro Plan), you get all of the Starter Plan benefits, plus extras including an operating agreement, expedited filing services, a virtual business guide, and Google Ads credit. The Pro Plan automatically renews each year.
- For $299 per year (Premium Plan), you get all of the Starter Plan and Pro plan benefits plus extras including a business website, a business domain name, and a business email address. The Premium Plan automatically renews each year.
- Affordable legal services
Read More: Best LLC Services 2023
There are many benefits to updating an operating agreement and adding a member to your LLC. The key benefit is that this designation limits your personal liability in the case of legal action; this can save personal financial resources. Once the LLC is formed and the proper paperwork is filed with the state, personal assets are separated from company assets, there are tax benefits, and the business entities will be set up to operate within the regulations of your state. The single or multi-member LLC operating agreement offers an additional explanation of the rules and roles of the various business partners and general operating principles. This business structure may be critical to how your business grows over time and even if it will be a success. Filing this type of agreement is a benefit to the owner or owners.
Frequently Asked Questions (FAQs)
An LLC, or limited liability company, is a type of business organization. This organizational style offers some protections to the business operator while still remaining simplified enough to make changes at a later date.
Every business can offer stock. Stock certificates are used to help finance the initial business release or add an influx of cash for expansion projects. Shareholders become part of the business records including the number of shares purchased, the cost, and when purchased should be recorded. Stock certificates can be either digital or physical.
There is no member or board number that must be met. The owner or owners to form an LLC can be only one person or can span as many members as needed. The company’s profits will be allocated between members according to the state’s limited liability laws. The entire agreement is binding and should help to protect all members to the extent permitted by law.
LLC operating agreements are the rules which govern the LLC. These include how members are added or removed from the LLC, voting rules, creating a capital account or capital investments, profit distribution, capital contribution, and stock agreements. Operating agreements can be amended at any time by a vote from the other members. A well-written agreement can help you avoid future disputes over the business.
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IRS. Limited Liability Company LLC | Internal Revenue Service. Irs.gov. Published 2019. Accessed February 3, 2023. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
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C corporations | FTB.ca.gov. Ca.gov. Published 2021. Accessed February 3, 2023. https://www.ftb.ca.gov/file/business/types/corporations/c-corporations.html
New Mailing Addresses. irs.gov. Accessed February 3, 2023. https://www.irs.gov/pub/irs-pdf/f8832.pdf
Employer ID Numbers | Internal Revenue Service. www.irs.gov. Accessed February 3, 2023. https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers