Preparing to Add a Member
Review your operating agreement. An LLC's operating agreement includes details about the roles and responsibilities of members, how decisions are made, how profits and losses are allocated, and how the business's structure can be changed. If your LLC has an operating agreement, it should have a clause dealing with changes in membership. If it does, you'll need to follow this procedure to add a member. If you don't have an operating agreement, you should consider hiring an attorney to draft one for you. If you'd rather draft the document on your own, many states have fill-in-the-blank forms that you can tailor to fit the needs of your LLC.
Check your state's LLC Act. If you don't have an operating agreement, the law of the state where you registered your LLC has default rules that outline the proper procedure for adding a new member, and the documents that must be amended or filed by law. For example, in Arizona an LLC can add a new member only if all members consent and if the new member is identified as a member in a written statement signed by all members identified in the original Articles of Organization.
Meet with the other members. If you have a multi-member LLC, schedule a meeting with your partners to discuss the potential new member before you hold a vote. At the meeting, you'll want to demonstrate the qualifications, financial resources, and general business experience of the potential new member. The other members may want to interview the member candidate, if they don't already know her, and ask her questions. After the interview, they probably will want to discuss and debate the advantages and disadvantages of bringing a new member on board. The existing members need to agree on the new member's capital interest, as well as how this effects the value of the capital investments made by the existing members. If the capital interests of existing members aren't updated when a new member is added, the new member could receive a disproportionate amount should the business be dissolved.
Vote on adding the new member. State law typically requires a unanimous vote by all members to add a new member, unless the LLC's operating agreement provides for approval by less than unanimous consent. When you sit down with the other members to vote, make sure you document in writing whether each member approves or disapproves of adding the new member. The meeting to vote on the new member should be called formally, with advanced notice given to all members.
Amending Company Documents
Amend your Operating Agreement. There are a number of sections of the Operating Agreement that need to be updated to account for your new member. At a minimum, you will need to update the sections that cover the percentage interests of each member in the company, their capital contributions, the allocation of profits and losses, and voting power of all members. Since a new member acquires an interest in the company, the interests of existing members in profits, losses, and distributions will automatically be affected. Any clauses in the operating agreement dealing with members' economic interests will have to be changed.
Amend your Articles of Organization. In some states, you also must amend your LLC's Articles of Organization to reflect the addition of a new member. For example, Arizona requires you to amend this document if a new member gains 20 percent or more of the percentage interests in the company, or if a new person acquires any member interest at all in a member-managed company. Your state law will have a deadline for any amendment to be filed following the event that prompted the amendment. For example, in Arizona you have 30 days from the day you add the new member to file your amendment with the state. You also will need to amend your articles of organization if you are changing your business management structure from a member-managed LLC to a manager-managed LLC, or vice versa.
Draft an Assignment of Membership Agreement. This contract outlines the interest you are transferring to the new member, and what the new member is investing in return for that interest. This agreement is similar to a deed or bill of sale. The ownership interests in the LLC are being reconfigured, which ultimately means the standing members are selling a portion of their interest to the new member.
Draft a Resolution of Members. If you have a multi-member LLC, a written resolution to add the new member should be signed by all members so there is record of everyone agreeing to the change in membership and membership interest.
Completing Government Filings
File the amendments with the Secretary of State. If you were required to amend your articles of organization, you must file the amendment with the Secretary of State or other agency in charge of business filings in your state. Since operating agreements don't have to be filed with the state, you can amend the agreement without filing anything. However, some states give you the option to file your operating agreement. If you took advantage of this option, you should file your amendment as well. Check with your secretary of state's office to find out if you can file the amendments online or if you are required to file paper forms. You will have to pay a fee for filing an amendment, typically around $100. Check with the secretary of state or business filings agency in your state to find out the exact fees and what those fees include. If the fees don't include a certified copy, you need to find out how much that will cost so you can get at least one certified copy for your business records.
Determine if you need to get a new EIN. The EIN is your LLC's tax number for federal and often state purposes. Generally, you need a new EIN if your LLC's ownership or structure changes. If you were operating as a single-member LLC and added a new member, you will need to get a new EIN. However, if you already had a multi-member LLC and you're simply adding a new member, you usually won't need to get a new EIN.
File the Entity Classification Election form with the IRS, if necessary. If adding a new member resulted in a change in the way your LLC is classified, you must file this form to let the IRS know. Unless you make a different election using Form 8832, the IRS will classify your LLC according to the default rule. Multi-member LLCs are treated as partnerships for tax purposes by default. Therefore, if you wanted your LLC to be treated as a corporation for tax purposes, you would need to file Form 8832. Generally, as long as you have at least two members before you add the new member, the LLC's income tax status is not changed by adding a new member and there's no reason to notify the IRS.
Register change in name with state and federal authorities, if necessary. Sometimes when you add a member, you also change the name of the company. For example, suppose you and your spouse ran "Sasquatch Ice Cream, LLC." Your son has recently graduated with a business degree and is eager to join the family business. When you add him as a member of your LLC, you want to change the name to "Sasquatch and Son Ice Cream, LLC." To do this, you would have to file documents with the state and with the IRS to register the name change. To change your name with the IRS, you need to send notice to the IRS at the address where you filed your return. This notice must be signed by a partner of your business. To change your name with your secretary of state, you'll need to fill out the appropriate business name change form and pay the required fee, which may be as much as $200.
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