How to Add a Member to an LLC? (All You Need to Know)
Adding a member to an existing Limited Liability Company (LLC) is a crucial step toward growth and shared responsibilities. The process can be simple, since the provision is included in the Operating Agreement.
With experience in business formation and an in-depth understanding of LLC operations, I've explored the idea of adding a member to an existing LLC. I further researched and consulted with legal professionals to assist you in the process.
Quick Summary
- To add a new member to an LLC, review the operating agreement, hold a meeting and vote on the motion, and amend your Articles of Organization.
- A new member can infuse capital, provide expertise, and widen business affiliations.
- The average annual growth in LLCs has been dramatically high at 21% over the last 30 years, as per LexTree, showcasing the increasing popularity and establishment of LLCs within the business sector.
- In my experience, the main benefit of having a new member is the business insight they offer in line with their expertise.
Steps to Follow to Add a Member to an LLC
Adding members to an LLC can be a great way to grow your business, gain more capital, and expand your network.
Here are the steps you will need to follow to add a new business partner:
1. Review Your Operating Agreement
Start by reviewing your operating agreement to see the provision about adding members.
An LLC operating agreement should describe how a new member is added, and it may provide a specific procedure to follow.
The document would specify if all the members had to agree or if a majority vote would be enough to admit the new member. In the absence of an operating agreement, state rules apply. This is the reason why I encourage clients and new business owners to draft an operating agreement.
According to the IRS tax statistics, the majority (71.7%) of all partnership returns filed in the U.S. for 2021 were from LLCs, emphasizing their dominance in the partnership landscape for the 20th consecutive year [1].
This reinforces the importance of a well-structured Operating Agreement in an LLC's governance.
2. Understand the Consequences
Adding a member can have business implications, so it's important to understand them before making a decision.
A new member will contribute supplementary capital to your LLC and increase its overall finances. Additionally, the individual could provide personal expertise and business experience.
"Introducing a new member to the team dilutes the ownership stakes of current members. Therefore, it's essential that this newcomer contributes significant value to compensate for the equity that existing members are relinquishing."
- Jon Morgan, Co-Founder & Chief Editor of Venture Smarter
The new member can expand your business network through contacts, associates, and affiliations with other companies.
As LexTree statistics show, the average annual growth in LLCs has been notably dramatic and compelling, at 21% over the last 30 years [2].
This underscores the expanding role and appeal of LLCs in the business landscape, making them a valuable option for growth and collaboration.
3. Meet with the Potential Member
You can conduct a preliminary meeting with the potential member to settle the terms of inclusion. You may discuss the amount of investment, share of ownership, profit, and loss, as well as the rights and duties of the individual.
Whenever we add a new member to our company, we explain the mutual benefit between the business of the LLC and the members.
4. Hold a Meeting of the LLC Members
Once the provisions have been reviewed, inform all the owners through a formal notice to conduct a meeting and vote on the proposed act to admit a new LLC member.
If you have a single-member LLC and decide to admit a new member, it will automatically change the classification of your business into a partnership. You have to draft and file Articles of Amendment with the Secretary of State and inform the IRS about the change in tax status.
5. Amend the Articles of Organization
If the members vote to admit the new member to your LLC, the addition needs to be included in your Articles of Organization. This can be accomplished by filing an amendment.
The Articles of Amendment must include:
- Your LLC's name
- Date of formation
- Name, title, and address of the new member
- The effective date
The document must be signed by a member or an authorized person on behalf of your LLC and filed with the Secretary of State.
6. File Any Required Tax Forms
In most cases, federal tax form 8832 must be filed when adding a new member to your LLC [3].
I inform my clients that filing taxes is one of the main ways to remain compliant and maintain good standing with the state.
FAQs
Is There a Limit to the Number of Members an LLC Can Have?
There is no limit to the number of members an LLC can have, unless the company opts to be taxed as an S-corp. The classification limits the members to under 100.
Can an LLC Have Foreign Members?
Yes, an LLC can have foreign members. In the United States, there are no citizenship or residency requirements for members (owners) of an LLC. This means that foreign individuals, foreign entities, and even other LLCs can be members of a U.S. LLC. However, there are certain considerations and requirements, such as tax implications and the need to obtain an Individual Taxpayer Identification Number (ITIN) if the foreign member does not have a Social Security Number (SSN).
References:
- https://www.irs.gov/pub/irs-soi/soi-a-copa-id2305.pdf
- https://www.berkmansolutions.com/articles/entities/30-years-of-new-business-entities
- https://www.irs.gov/forms-pubs/about-form-8832
