The passage of time can bring about waves of change in the operations of any business. Shifts in market conditions, operational costs and your own life circumstances can create a situation in which you find it advantageous to bring in new talent. When the business in question is a limited liability company (LLC), you must take certain steps to add a new owner, or "member." Doing it right will help you avoid negative tax consequences and preserve the limited liability protection that led you to organize as an LLC in the first place.
Review your operating agreement, specifically the sections pertaining to adding a new member to the LLC. Adding a new member in violation of the operating agreement will not only get you in hot water with the other members, but in a best case scenario it will endanger the limited liability shield in the event of a lawsuit against the company. Your operating agreement may require a meeting and vote, written consent or spoken consent of all or a majority of members. If the agreement is silent as to the manner of consent, draft a simple document stating that the members intend to add this specific new member as of this specific date. If you have no operating agreement at all, you should get one at this stage.
Read More: How to Add a Member to an LLC Company
Amend your operating agreement to add the new member to the LLC and bind her to the provisions of the agreement. While you may draft an entirely new operating agreement, it may be sufficient to simply execute an amendment. Identify the date of the original agreement and the parties, state the date the members agreed to add the new member, and specify the sections of the original operating agreement to be amended and how they are to read now. Don't forget to classify the new member's interest. A managing member will have the right to participate in management and operations, but a non-managing member will be entitled only to a share of the profits. This difference has important tax ramifications.
Amend the articles of organization that you filed with the secretary of state or corporations when you organized your LLC. Most states have a simple form for you to fill out and submit. Indicate all changes in membership, membership interests, addresses, business purpose or registered agent for service of process. The fee for amending your articles of organization varies from state to state and should be listed on the website for the secretary of state or corporations in your jurisdiction.
Make sure that everything you're doing in adding a new member to your LLC is documented and as clear as possible. Losing limited liability protection against suit is only one danger here; no matter how strong your LLC's limited liability shield is against outsiders, it will not protect you and your co-members from suit by each other in the event of a future disagreement. Establish the intent of all parties in writing, even if your new member is a close and trusted part of your family.
Consult with an experienced business attorney before adding a member to your LLC or engaging in any substantial negotiations to add the member. Discuss the legal ramifications of your decision to add a new member and any changes that may be necessary to your operating agreement. Consult with a certified public accountant to fully explore the tax ramifications of your decision.
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