Adding partners to a limited liability company is relatively straightforward -- especially if the process is delineated in your company’s operating agreement. This document explains how to add a member, as LLC partners are called, and how to define the new member’s role and set the percentage of ownership interest.
Buy-in procedures written into the operating agreement include:
- Controlling who can buy a membership interest in the LLC, so the company can restrict a current member from simply selling his interest to someone else.
- Setting the vote of existing members required to accept a new member, such as a simple majority, a 2/3 majority or a unanimous vote. Since you would be changing ownership interests, requiring a unanimous vote is fairly common.
Negotiate the New Member’s Buy-in
An LLC's operating agreement allows you to distribute the profit to members disproportionately to the amount of investment each has made into the company. Reasons for doing so include allowing a higher percentage profit share to member managers to compensate for the work they put into the company.
A prospective member’s buy-in can change those percentages. Current members should agree to the range of percentage they’re willing to offer before negotiating with the prospective member about what she’s willing to accept. If you are willing to bring in a new person as a member manager, you should also discuss and clarify what management role the prospective member would play.
Amend the Operating Agreement
Amend the operating agreement as needed to add the name of the new member, set the percentages for each member's share of profit and define the new member’s role as a member manager or passive member. If the new partner is to be a member manager, define the new member's duties in the amended agreement. Once it's approved, all members -- including the new members -- should sign the amended agreement.
Update Articles of Organization
States require an LLC to file articles of organization when the company is formed, but not all states require the articles to be amended whenever there’s a change in membership. Your state may only require ownership changes to be reported in an annual report or renewal form.
Add the New Member to the LLC's Tax Filing
At tax time, add the new member and any changes in profit share percentages when you file Internal Revenue Service Form 1065. This is an informational return only for the LLC, as profit shares are passed through to members, with each member reporting her share of the profits on individual returns.
- KEYT Law: LLC – Adding or Removing a Member
- LLCC: Adding a Member to a Single-Member LLC
- Inc. Now: How to add or remove members from a Delaware LLC
- New Jersey Law Blog: Considerations When Adding Members to Your Solely Owned Limited Liability Company
- Nolo: LLC Owner Buyout Agreements
- Noel: The LLC Operating Agreement