Adding a Member to a Single Member LLC: Everything You Need to Know
By adding a member to a single-member LLC, the Limited Liability Company (LLC) changes to a multi-member LLC which can have different rules and regulations depending on the state in which the company was formed. 4 min read
By adding a member to a single-member LLC, the Limited Liability Company (LLC) changes to a multi-member LLC which can have different rules and regulations depending on the state in which the company was formed.
Adding Another Owner to the LLC
LLCs didn't become very popular entity types for business owners in the United States until 1997.
As their popularity grows, more and more companies are seeking to add to their capital and manpower by adding on new LLC members once the company has already been formed.
When an LLC wants to add a new member to the company ownership, this is a major change and will likely require a change in taxation and an amendment to the operating agreement.
Whether you're the owner of a single-member LLC looking to gain a partner in the business, or you have an investor equipped with the finances to take your company to the next level, there are many reasons you might look into adding a member to a single-member LLC. Sometimes employees might make themselves so valuable that you want to offer them stake in the business as recognition of their hard work.
Adding new members (or owners) isn't a very hard process, but the proper procedure needs to be followed. Your company might have the process spelled out in the operating agreement, but if it doesn't, each state makes provisions for companies without written agreements.
As an LLC is the type of business entity that is structured specifically to protect its members from liability, following correct procedures in all major company decisions helps to keep this protection intact. Operating agreements are written and signed to avoid potential issues among the members.
LLCs are viewed as separate entities from their owners in the eyes of the IRS and the state, so adding and changing members doesn't affect this status.
How to Add a Member to an LLC: Understand the Consequences
While adding a member to a single-member LLC has its benefits, there are also some possible problems that owners should be aware of such as:
- An additional member will spread out the ownership in the LLC, so the 100 percent of profits that once went to the single owner will be split between the two members or more as they're added.
- If an LLC is managed by its members, a new member will have a say in company decisions, adding another set of opinions to the mix.
- As members are added, they gain a financial interest in the company, so you'll want to be sure of the addition, as it'll be tough to reverse if the new addition doesn't pan out. There are other ways to get someone involved in a company if membership doesn't feel like a good fit.
- Single-member LLCs are taxed as sole proprietorships, but if a new member is added, making it a multi-member LLC, the taxation status will change. Multi-member LLCs can choose to be taxed as partnerships or corporations.
It's always a good idea to talk to a business attorney before making any huge decisions like adding a new member.
How to Add a Member to an LLC: Review Your Operating Agreement
You'll want to look over the LLC's operating agreement before adding a member to the company. Operating agreements should include details regarding how these types of decisions should be made and the process the existing member or members should follow.
When the members of an LLC are careful to adhere to the rules and regulations of their operating agreement, they solidify their status as an independent business that rules itself rather than being controlled completely by the state.
Each state provides its own limited liability laws for LLCs that don't write operating agreements or have agreements that don't cover certain aspects of company ownership and management. State regulations should be followed if an LLC is lacking an operating agreement.
Certain states actually require LLCs to be dissolved and re-formed under the new ownership when any members are changed or added.
Single-member LLCs benefit less from operating agreements because there's only one owner and therefore no one to dispute with, but multi-member LLCs do well to have detailed operating agreements. All of the members should see their ownership and responsibilities clearly outlined in their LLC's operating agreement.
Be sure to check the particular LLC laws in your state before adding a member to any LLC (whether single or multi-member). The laws are different throughout the country, so it's always good to double check.
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