A limited liability company (LLC) is a business structure that provides limited liability to its owners. An LLC is created by filing articles of organization with the state in which the LLC will do business.
An LLC operating agreement is a contract between the members of the LLC and governs the operation of the LLC.
The LLC operating agreement can be amended by the members of the LLC, however, there are some additional things to take into consideration.
Changing Owners of an LLC: Change in Management
If you sell the company, the new owner will be based on whether you are selling a portion of your company or the entire business.
A buy-sell agreement allows business owners or partners to sell their shares in the firm.
The step for acquiring a member of an LLC is outlined in this document, which will also aid in handling any potential issues if the shares are not sold.
If you have partners in your LLC, and one of them sells their share of the company to a third party, then a buy-sell agreement should be in place to dictate the steps that need to be taken.
To notify certain organizations if you want to add or delete a member of your LLC, go to the articles and regulations section on your state's government website. These institutions could be:
- Banks
- IRS
- Foreign LLC
- Registered Agent
- Other Third Parties involved
Changing LLC Members: Amendment of Operating Agreement
If circumstances arise and you need to make changes to the LLC membership, you will have to amend the LLC's operating agreement.
This document governs how the LLC is run and amended agreements must be signed
When you initially formed your LLC, its members most likely created two essential documents: an LLC's Operating Agreement and an LLC's Articles of Organization.
If you add or delete a member of your LLC, for example, both documents must be updated.
It's critical to understand when and how to change these papers in order to operate your firm lawfully and adhere to state regulations.
If there is a change in management, the new management must be approved by the LLC's members. The new management can be appointed by the existing management or by the members themselves.
Although you can internally have an LLC Operating Agreement amendment, you must notify the proper authorities. Check your state's reporting requirements to see if you need to submit a report when LLC members change.
Most states also require notification when there is a large ownership percentage change in an LLC.
If you change the Agent or company address of your LLC, you must update its Articles of Organization. You'll need to have an LLC Operating Agreement amendment if you alter the management or financial setup.
It's also vital to understand when it's appropriate to modify your formation papers. For example, most people believe that amending the LLC Operating Agreement is required when an LLC member dies, even though this isn't always the case.
The will of a deceased member may sometimes stipulate how their own interest should be transferred.
Typically, however, the LLC Operating Agreement amendment is required when an LLC member leaves the company involuntarily or voluntarily.
1. Changing Members of an LLC
If there is a change in membership, the LLC's operating agreement must be amended to reflect the change. The amendment to the LLC operating agreement must be approved by the LLC's members.
2. Paying Members Out of an LLC
If a member wants to pay their membership interest out of the LLC, the LLC operating agreement must be amended to reflect this change. The amendment to the LLC operating agreement must be approved by the LLC's members.
3. Transferring an LLC Membership Interest
If a member wants to transfer their membership interest in the LLC to another party, the operating agreement must be amended to reflect this change. The amendment to the operating agreement must be approved by the LLC's members.
4. Dissolving an LLC
If an LLC is dissolved, the operating agreement will dictate how the assets and liabilities of the company are divided among the members.
The liquidation of the LLC's assets and the payment of its liabilities must be in accordance with the operating agreement.
If an LLC is dissolving, the registered agent must be notified in writing at least 60 days before the effective date of the dissolution. The registered agent will then notify all interested parties, such as creditors and customers.
If you want to change your LLC's name, you'll need to update its paperwork. This is because if the name of your firm is changed, it must be registered with your state and obtain approval before you may use it.
You must also notify the IRS about any changes in your company's name.
How Do I Transfer Ownership of an LLC to a New Member with the IRS?
If you want to transfer the ownership of an LLC to a new member, you'll need to execute a Membership Transfer Agreement.
File Required Tax Forms
When you transfer ownership of an LLC, you must file Form 8832 - Entity Classification Election. You'll also need to file Form 8 transferring the tax liability to the new member.
This document will outline the terms and conditions of the transfer. You must also file Form 8832 with the IRS. This form is used to notify the IRS about changes in the ownership or structure of your business.
Form 8832 is also used to elect the new business entity classification for your LLC. The new member will need to file this form as well.
There are four possible business entity classifications for Limited Liability Companies:
- C Corporation
- S Corporation
- Partnership
- Sole Proprietorship (Single Member LLC)
You must make a decision about the business entity classification for your LLC. The new member will need to agree to the classification that you choose.
If you want to change the management or financial setup of your LLC, you must amend your LLC's Operating Agreement.
This document will outline the changes that are being made and must be approved by the LLC's members.
Check Your State’s LLC Act
The Operating Agreement is a contract between the members of the LLC and it should be amended in a similar fashion. The amendment to the operating agreement must be approved by the LLC's members.
Before you make any changes to your LLC, you should check your state's LLC Act. This will give you an idea of what changes are allowed and what changes require the approval of the LLC's members.
Your state's LLC Act may also specify how much notice must be given before a change in the LLC can take place.
Be sure to have an attorney review your Operating Agreement and make the appropriate amendments. This will help to ensure that the changes are in compliance with your state's LLC Act.
Submit the Amendment to the Secretary of State's Office
After the LLC operating agreement amendments have been made, they must be submitted to the Secretary of State. This will ensure that your LLC is in compliance with state law.
The Secretary of State will also keep a record of all the amendments that have been made to your LLC's Operating Agreement.
Changing Members of a Foreign LLC
If your LLC is foreign, you must follow the laws of the state in which it is registered. This means that you must adhere to the state's LLC Act and follow all the required procedures.
FAQs
How Do I Add Someone to My LLC?
You'll need to execute a Membership Transfer Agreement and file Form 8832 with the IRS. You must also file Form 8 transferring the tax liability to the new member.
How Do I Change My LLC Operating Agreement?
You'll need to have an LLC operating agreement amendment. This document will outline the changes that are being made and must be approved by the LLC's members.
Changing Members of an LLC: Conclusion
As with any business decision, changing LLC members should not be taken lightly.
You'll need to make sure that all the necessary paperwork is filed and that the changes are in compliance with your state's LLC Act.
If you are still unsure of how to amend the operating agreement of your LLC, be sure to consult an attorney or a law firm that can provide legal advice.
