A limited liability company is owned and run by its members, and it operates according to the terms of its operating agreement and state law. An LLC is not typically structured in such a way that it's easy to add members, but it can be done. Although laws vary among states, and LLCs' operating agreements vary as well, there are certain procedures commonly involved in selling a percentage of an LLC.
Review the operating agreement. The operating agreement is the set of rules and operating standards that the members of the LLC agreed to when they formed the business. The agreement may discuss the management structure of the LLC, each member's stake and the voting requirements to execute actions by the LLC such as adding new members. Generally the operating agreement will dictate how the business is run in most matters.
Read More: Do LLC's Have Bylaws or Operating Agreements?
Authorize the addition of new member. Follow the procedure outlined in the operating agreement regarding how to authorize a new member. If the operating agreement is silent on this issue, most states require that the current members unanimously approve the new addition.
Establish what rights the new member will have. There are two types of LLCs. A member-managed LLC allows all members to make managerial decisions and to legally bind the business to contract. A manager-managed LLC limits those powers to representatives chosen by the members. If the new member is to take an active role in the business, make sure that the LLC and operating agreement is structured in a way that allows him to do so. If not, amend the operating agreement such that the member has the proper authority to act.
Establish a sales price. Since an LLC is not publicly traded, determining an appropriate value can be difficult. Consider getting an outside third party appraiser to help you establish a fair price for the percentage you are going to sell the new member.
Draft a purchase agreement. The purchase agreement should state the price and how big of a percentage the new member will receive. You should also consider adding other provisions such as confidentiality agreements to protect your LLC’s competitive advantage and non-compete agreements in case the new member decides to leave the business.
Execute a purchase agreement. Have the new member sign the agreement and pay for his percentage in the LLC. Deposit the money you receive in the LLC’s account. Make sure that the person who signs the agreement on the LLC’s behalf is authorized to make binding agreements as defined by the operating agreement.
Update your capital accounts ledger. The capital accounts of an LLC are how the business keeps track of the contributions made and the distributions received by each members. Create a new account for the member, noting how much he paid into the business.
- Entrepreneur: Limited Liability Company
- Citizen Media Law Project: Limited Liability Company
- Citizen Media Law Project: Operating Agreement
- Alberty Publishing: Adding a New Member to an LLC
- Barth, Berus & Calderon LLP: March 2010: Member-Managed vs. Manager-Managed LLC’s
- Business Dictionary: Purchase Agreement
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.