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.
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 the potential consequences. A new owner can contribute a great deal to an LLC but will also diminish the percentage of profits that go to the original owners. In a member-managed LLC, a new owner will also add another voice to the decision-making process. And once someone has an ownership interest, it may not be that easy to get rid of them if things don’t work out as you expected.
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 will instead be taxed as a partnership or corporation.
To make sure you’re fully aware of the impact of adding a new LLC member, it’s wise to consult with a business attorney.
2. Review your operating agreement
Your LLC’s operating agreement probably describes the procedure you must follow to add a new member, including the way the membership must be voted on. 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 if your operating agreement doesn’t discuss adding new members, you must follow the procedure described in your state’s limited liability laws. In some states, you must dissolve and then re-form the LLC if there is any change in ownership.
If your LLC doesn’t have an operating agreement, now is a good time to get one. An operating agreement is essential for multi-member LLCs because it spells out the rights and responsibilities of the owners and their respective shares of the business and its profits and losses. It is far easier and cheaper to draft an operating agreement than to try to resolve these issues when there’s a dispute among the owners.
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 LLC
Once you have 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 list the new owner’s name, any capital contribution that the new owner is making, the owner’s percentage interest in the company, and the percentage of profits and losses that can be allocated to that owner.
The members should then formally vote on the amendment in the way described in the operating agreement. Document the vote in your LLC’s minutes and/or with a resolution, and have all the LLC’s members – including the new one – sign the amended operating agreement.
Keep the amended operating agreement at your place of business with your other important business documents.
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 it’s important to think things through before you act. Once you’ve made your decision, adding a new member is just a matter of following your operating agreement’s procedures, creating a formal record of the new ownership, and filing any required documents with the state.