Adding an owner to your limited liability company (LLC) isn't particularly difficult, but you need to follow the procedure outlined in your operating agreement or state law.
To add an owner to an LLC, you'll typically need to:
- Review your operating agreement for membership procedures
- Agree on ownership percentages and profit allocation
- Prepare and vote on an amendment to the operating agreement
- File any required amendments with the state
- Obtain necessary tax forms (such as an EIN for multi-member LLCs)
Remember, an LLC is a distinct business entity that protects its owners from personal liability. Following formal procedures and keeping good records helps to maintain that protection and to avoid future disputes among the owners.
Follow these steps for a smooth process when you add an owner to an LLC.
1. Understand the consequences
Before you add a new LLC member, you should fully consider both the benefits and potential consequences. A new owner can contribute a great deal to an LLC, but there are tradeoffs.
- Profit dilution: Adding a member reduces the percentage of profits going to the original owners.
- Decision-making changes: In a member-managed LLC, a new owner adds another voice to the process.
- Exit difficulty: Once someone has an ownership interest, removing them if things don't work out can be complicated.
If you have a gut feeling that the new owner is someone you’d rather not have as a business partner, consider whether there is another way to accomplish your business goals.
Adding another owner can also have tax consequences. If you own a single-member LLC, you'll no longer have the option of being taxed as a sole proprietor—you'll instead be taxed as a partnership or corporation. To make sure you're fully aware of the impact, consider consulting a business attorney.
2. Review your operating agreement
Your LLC's operating agreement likely describes the procedure for adding a new member, including voting requirements. It is important to follow the procedure described in the agreement because it helps to show that your LLC really is an independent entity that follows its own rules.
If you don't have an operating agreement—or yours doesn't address adding members—follow your state's limited liability laws. In some states, any change in ownership requires dissolving and re-forming the LLC.
If your LLC doesn't have an operating agreement, now is a good time to get one. An operating agreement is especially useful for multi-member LLCs because it spells out:
- Rights and responsibilities of each owner
- Ownership shares in the business
- Allocation of profits and losses
It's far easier and cheaper to draft an operating agreement than to resolve these issues during a dispute.
“A common mistake is thinking trust replaces documentation. Partners say, ‘We’re friends, we don’t need a contract.’ But most disputes I see come from two people who were both sincere; they just had different expectations. It’s better to commit to things in writing, so if there's ever a dispute, you can point to it.”
Business Attorney
In order to create one, a simple and straightforward way is to use a sample LLC operating agreement that can make the drafting process less overwhelming. But if your LLC has some unique considerations, it is good to involve an attorney who can tailor the agreement to reflect an LLC's exact structure and prevent oversights that could lead to future legal headaches.
3. Decide on the specifics
Once you understand the procedure for adding a new owner, you must determine the specifics of your arrangement. LLCs are very flexible in their ownership structure: for example, a person can own a certain percentage of the business, but may be entitled to a different percentage of profits.
Discuss ownership percentages with the existing LLC members as well as the prospective new member to arrive at an agreement.
4. Prepare and vote on an amendment to add an owner to the LLC
Once you've decided how to structure the new owner’s interest, you should prepare an amendment to the operating agreement to add the new owner to the LLC. The amendment should include:
- The new owner's name
- Any capital contribution the new owner is making
- The owner's percentage interest in the company
- The percentage of profits and losses allocated to that owner
Members should then formally vote on the amendment as described in your operating agreement. Document the vote in your LLC's minutes and/or with a resolution, and have all members (including the new one) sign the amended operating agreement. Keep the signed document at your place of business with other important records.
5. Amend the articles of organization (if necessary)
When you formed the LLC, you filed articles of organization with the state. In some states, you may have to file a form amending the articles to add a new member. In other states, there is no LLC member information in the articles, and no amendment is necessary.
You can check the requirements for your state by contacting the state agency responsible for business filings (usually this is the Secretary of State).
6. File any required tax forms
If you’ve been doing business as a single-member LLC and using your Social Security number as your federal tax identification number, you’ll need to obtain a federal employer identification number (EIN) when you become a multi-member LLC. You can obtain an EIN for free by filling out a form on the IRS website.
If your LLC has been taxed as a sole proprietorship or partnership in the past and you now want to be taxed as a corporation, you’ll need to file additional forms with the IRS to elect corporate status. A lawyer or tax accountant can advise you on the best tax status for your LLC.
Adding an LLC owner means taking on another business partner, so think things through before you act. Once you've made your decision, the process is fairly straightforward: follow your operating agreement's procedures, create a formal record of the new ownership, and file any required documents with the state.
'%20/%3e%3c/svg%3e)
'%3e%3cpath%20fill-rule='evenodd'%20clip-rule='evenodd'%20d='M9.31239%2025.5316H13.0679V14.1032H9.31239V25.5316ZM11.1913%208.46875C9.93945%208.46875%209%209.25086%209%2010.505C9%2011.5995%209.78211%2012.5389%2011.1913%2012.5389C12.6005%2012.5389%2013.3826%2011.5995%2013.3826%2010.505C13.3826%209.4082%2012.6005%208.46875%2011.1913%208.46875ZM27%2018.9577V25.5316H23.2445V19.4275C23.2445%2017.8609%2022.6174%2016.7664%2021.3679%2016.7664C20.2711%2016.7664%2019.644%2017.5463%2019.3316%2018.1756C19.1743%2018.488%2019.1743%2018.8004%2019.1743%2019.1128V25.5316H15.4165V13.9458H19.1743V15.5123C19.644%2014.7302%2020.5835%2013.6357%2022.6174%2013.6357C25.1234%2013.7908%2027%2015.3573%2027%2018.9577Z'%20fill='white'/%3e%3c/g%3e%3cdefs%3e%3cclipPath%20id='clip0_952_9489'%3e%3crect%20width='18'%20height='18'%20fill='white'%20transform='translate(9%208)'/%3e%3c/clipPath%3e%3c/defs%3e%3c/svg%3e)
