Adding a Member to Your LLC
Provided by HG.org
When the current owner or co-owners in a limited liability company have considered adding a new person, there are various factors to consider. Adding a new member is often more complicated than it first appears, and it is important that all the necessary paperwork, contracts and information are cleared before he or she becomes a member of the LLC.
The documentation of an LLC should include an operations agreement that explains various aspects of company policy, obligations, responsibilities and what to do in the event of a deadlock. This means that each member should have his or her own duties that are separate from the others. One may be the bookkeeper, another could be the person providing financial support and one may be the individual in charge of product development. When increasing these persons by another member, this person should have his or her own obligations such as marketing or advertising. This should be edited in the operations agreement including how much of an interest he or she has.
Each person that is part of the ownership of an LLC should have a portion of interest in writing. It is suggested by experts that this percentage of ownership is uneven so that votes and the direction of the company may more easily be determined. However, this could be based on a financial obligation. This means that the original owner may not have the necessary funds to run the company and needs a partner for finances to develop and market a product. He or she may become an equal owner when added to the LLC. However, the specifics should be modified in the operations agreement with an out clause if he or she needs to leave the company.
Understanding the Consequences of Adding a Member
When the owner or co-owners of an LLC are considering adding someone else into the mix, it is important to understand the benefits, disadvantages and issues that could arise. While the individual may be bringing something necessary to the company, he or she is also adding another element to the already existing relationship. This could mean chaos, or he or she could be the peacemaker. Another person also means that profits are then divided by one more. This could cut profits into halves, thirds, fourths and so on. If his or her presence causes undue tension, removing his or her membership is often complicated and fraught with difficulty.
Other aspects to consider are taxation and the operations agreement. Taxes cannot be filed as a sole proprietorship when there are at least two different owners or partners in an LLC. The business must then file as a partnership or a corporation. Additionally, the operations agreement may need to be redrafted entirely or just edited based on the ideals, information and details of all involved. This document may also already have a process for adding a new member to the company. It is important to follow these procedures if they’ve already been included in the operations agreement that the current co-owners or single owner signed.
The Specifics of Adding a New Member
Once all the procedures and pieces of information about adding the new member have been considered and understood, it is time to decide on and implement the specifics. This means knowing the role the new member will play and what duties he or she will have. He or she must have a certain percentage of ownership decided and his or her profits may be a different percentage. Once these issues have been solved, they must be put in writing. This means amending the operations agreement.
Structuring the new member’s interests should be detailed in the operations agreement along with his or her voting and decision making rights. Profits and losses attributed to his or her responsibilities should have terms in the agreement along with all his or her details. The formalities should be adhered to such as voting the new member in and recording the minutes of the meeting. Once the operations agreement has been edited with this new information, it should remain at the company location along with other vital documents. If necessary, it is important to amend the articles of organization with the new member added.
The Business Lawyer in Adding a New LLC Member
For document drafting, editing and changes, it is important to have a lawyer present and assisting with these matters. Without a legal professional, mistakes could be made and some items may not be valid.
Read more on this legal issueUnderstanding the Differences Between Corporations, LLC's, and Partnerships
Importance of Maintaining a Business’ LLC or Corporate Status
Do LLCs Have to Follow Certain Corporate Formalities
Questions to Pose for Your LLC Agreement
Definition and Benefits of a Limited Liability Company
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.