How to Add an Owner to an LLC
< View All PostsA single-member LLC is one of the most common structures for small businesses that operate with just one person at the lead. Yet, there are times when you may want to change the structure of your limited liability company (LLC) to include more than one owner. You can learn how to add an owner to an LLC, but it is also important to understand what this may mean for your coming going forward.
At the heart of this is understanding what procedure is already in place in your operating agreement or any requirements that may be related to your state’s laws. Let’s take a closer look at this process.
Who Counts as an LLC Member?
An LLC member is simply the owner of the company. It is possible for a person or a company to own an LLC. That person or company is called a member. It does not matter if they own just one percent of the company or the entire company in full – owners are called members.
Owners are not paid wages but rather are paid a percentage of the company’s profits. Your LLC agreement outlines every member’s percentage of ownership. That means it also allows for the amount of income they will receive in profit. When you create an LLC, you’ll outline these rights.
Why You Might Need to Add a Member
There are a few key reasons you may need to or want to add a member to your LLC. For example, you may want to add someone to the company’s ownership because they have the ability to contribute significantly towards the company. You may want to introduce someone to the company that will help it grow or take over ownership for you in the years to come. You may want to add a member to the company because you want help splitting the costs of ownership. There are countless reasons why this may be a good option for your business.
At the same time, it’s critical to understand the consequences of adding another member. When you add another LLC member, you both become responsible for the company. That also means that your profits will be split to accommodate this new member. Your LLC agreement will outline the percentage of this. Also, note that this new owner will also have a role in the decision making for the company. Also note that once they are a member, it is difficult to remove them from that role over time.
How to Add an Owner to an LLC
Once you make the decision to move forward, you’ll need to learn how to add an owner to an LLC based on what your operating agreement states. This may differ from one organization to the next, but your operating agreement serves as a valuable tool for managing decisions like this. This agreement outlines how the membership is voted on.
You may not have these rules outlined in your operating agreement in some situations. If that’s the case, your state will have limited liability laws to follow. In some states, it is necessary to dissolve the LLC and then reform it with the new member added.
Once you learn what the requirements are, there are several steps to take in this process, typically:
Determine the specifics of the change
Determine the specifics of the arrangement with the new owner. This may include how much of a percentage of the business the new member owns. Also, address the percentage of the profits the new member will be entitled to receive. Be sure all members of the LLC right now agree to this.
Prepare the amendment to add the owner
The amendment to the LLC will include all details about the change, including the new owner’s name, any type of capital contribution that person is making, and the percentage of interest they are getting in the company. It should also assign the percentage of both profits and losses allocated to that owner.
Vote on the new amendment
If you already have a multi-member LLC, all owners should vote on the decision. Vote based on the requirements set in the operating agreement. In a single-member LLC, that’s not necessary.
Change the Articles of Organization
The Articles of Organization were filed with the state when you first set up your LLC. Now that you have made significant changes to it, it’s important to update this information with your state. Some states allow this to be done through a simple form. The state agency for these filings, usually the Secretary of State, typically oversees this process.
Not all states require an update to the Articles of Organization. No updates are necessary if your state does not require LLC member information.
Update tax forms
The final step in the process is to update your tax forms. The IRS requests information from a Responsible Party of the LLC when the federal employer identification number (EIN) is issued in the LLC’s name. You must notify the IRS if the departing member is listed as the Responsible Party. It is best to do this with the guidance of an organization that can help you with ensuring it is done properly, so there are no difficulties at tax time. If you have not done so yet, you will need to obtain a federal employer identification number (EIN) once you become a multi-member LLC.
Get the Help You Need Throughout the Process
Making big changes like this to your business is not something you should do on your own. That’s why Eco-fyle is here to help you. We work with you to ensure you start or manage your business properly, minimize risks to it, and ensure that your goals are met. We can help you with most types of company changes, helping you make better decisions for your business as it grows or changes goals.
Take a few minutes to learn more about how we can help you. Contact us now for immediate help with any LLC needs or any type of legal incorporation.
