How to Change a Single Member LLC to Multi Member: Everything to Know
The process of how to change a single-member LLC to a multi-member LCC is required if you are the only owner and want to add additional owners.3 min read
2. Membership Transfer Rights
3. Adding to a Single-Member LLC
4. Determining Specifics
5. Notifying Authorities
The process of how to change a single-member LLC to a multi-member LCC is required if you are the only owner of your limited liability company and want to add additional owners (known as members). An LLC is a business entity that provides limited liability protection from business debts and obligations. This type of business can have any number of members.
The exact laws regarding an LLC vary depending on the state in which it was established. But the general guidelines are similar from state to state. In most cases, a new member must be documented in the articles of organization, which are created when the LLC is formed. In these articles, you can outline the procedure for adding new members pursuant to state laws.
Operating Agreement or Written Consent
When the terms for adding a member are outlined in the operating agreement, these are the steps a person or business must follow to gain membership in the LLC. If these terms are not outlined, they can be established by agreement of all existing members. This must include unanimous signed, written consent on the individual or entity in question, and his or her interest percentage.
Membership Transfer Rights
The operating agreement can also establish the rights of members to transfer a portion of his or her interest in the LLC to another individual or entity. The new member would be added after the member, who initiated the transfer, follows the steps outlined in the operating agreement.
Adding to a Single-Member LLC
If you're currently the only member of your LLC, you can make your own rules about how other members can be added. You may want to:
- Collaborate with a business partner
- Receive funds from an investor
- Give a dedicated employee an ownership stake in the LLC.
If the procedures are not already established in the operating agreement, follow the laws for adding a member in your state. Following these rules is important to maintain your personal liability protection and to avoid future ownership disputes. Consider these benefits and consequences of adding another member to your LLC:
- A new owner can contribute new ideas and skills.
- The percentage of profits you receive will decrease.
- Another decision-maker's opinions will need to be considered.
- It may be difficult to revoke membership status if any disputes arise.
If you're not sure whether the individual in question is someone you want to work with as a business partner, think about ways to accomplish the goals for your LLC without adding a new member.
After you add a new member, you'll need to add his or her name to the articles of organization and amend the operating agreement to note his or her membership percentage.
Some states require an LLC to dissolve and then reform if ownership changes. If you are a single-member LLC without an operating agreement, be sure to establish one before adding a new member. This will ensure the division of profits and losses is agreed upon in writing. This can help you avoid costly and time-consuming disputes.
LLCs benefit from a flexible ownership structure in which a member's ownership percentage does not necessarily need to correlate to the percentage of profits he or she receives. When these terms have been agreed upon by all members, you can amend the operating agreement with:
- The name of the new member
- The amount of any capital contribution he or she is investing
- His or her ownership percentage
- His or her percentage of profit and loss allocation.
Ratify the amendment with a formal member vote and sign the new agreement. This should be filed along with your other important LLC documents.
Most states require you to provide the secretary of state with amendments to your LLC articles of organization. In other states, you must file an annual member and manager list. This can be updated when you add a member.
If your LLC has pass-through taxation by default, you must elect that taxation when you add a new member by filing IRS Form 8832. That is because multi-member LLCs are taxed as partnerships by default. It's important to explore the tax consequences of adding a new LLC member.
If you need help with adding a new member to your LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.