How to Add A Partner to an LLC: Everything You Need to Know
How to add a partner to an LLC is a topic that many business owners want to learn more about. 3 min read
Adding a New Member to the LLC Overview
How to add a partner to an LLC is a topic that many business owners want to learn more about. Adding a new member to an LLC is a fairly simple process that consists of a few steps. A limited liability company (LLC) is a company formed by members who decide to operate their business as a partnership, a C corporation, or an S corporation.
Members of an LLC usually choose to operate their company as a partnership because the formation of an LLC allows profits to pass through from the company to the members. The members then pay income taxes on the portion of the profits they've received.
Before you add an additional member to an already existing LLC, you should consider both the advantages and the disadvantages. Here are some of the advantages and disadvantages.
- Pro: A new member has the potential to contribute a lot to a limited liability company.
- Con: Adding an additional member will decrease the percentage of profits that the original owners receive.
- Con: It can be difficult to remove a member if things don't work out.
Also, if the LLC is managed by the members, the new owner will also have a say when it comes to making decisions. Once an individual possesses ownership interest, it can be difficult to remove the individual as an owner.
If you would not like a potential new owner as a business partner for whatever reason, you should look for alternative methods for accomplishing the goals for your LLC.
Adding a Member to an LLC: Preparing to Add a Member
The first step in preparing to add a member to an LLC is to review the operating agreement. The operating agreement of the LLC includes information about the responsibilities and roles of members, how decisions can be made, how losses and profits are allocated, and how the structure of the business can be altered.
If the limited liability company in question possesses an operating agreement, you should check for a clause related to changes in membership. If the operating agreement does have such a clause, you should follow the procedures described in the clause.
However, if the LLC doesn't possess an operating agreement, an attorney should be hired to create an operating agreement for it. Another option is that the LLC could create the document without legal help. Some states offer forms with blanks to fill that the LLC can use to draft the operating agreement.
The second step involves taking a look at the LLC Act of the state. If the limited liability company doesn't possess an operating agreement, the state in which the LLC was registered will have default rules. These rules will describe the correct procedure for adding a member. The rules will also tell you which documents need to be filed or amended by law to add a new member.
For example, in the state of Arizona, a limited liability company can only add a member if all the members agree. The members need to sign a written statement identifying the individual as a new member. All members in the original Articles of Organization need to sign the written statement.
The third step is having a meeting with all the members. If the owner possesses a multimember LLC, the owner should have a meeting with all the partners to discuss the advantages and disadvantages of adding the new member. After the meeting, a vote can be held. At this meeting, the financial resources, the qualifications, and business experience of the new member should be demonstrated.
Some of the other members may ask to interview the candidate. The other members can also ask the potential new member questions.
If all the members agree to add the new member, they can proceed to the next step. The existing members will need to come to a consensus when deciding the capital interest of the new member. They will also need to consider how more capital will impact the value of the existing members' capital investments. If the members don't update these capital interests after adding a new member, the new member could end up receiving more than he should in the event the business is dissolved.
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