When you have a great business idea that you're passionate about, it can feel like destiny when you meet someone who catches your vision and believes in your company. It's even better if they have the skills or resources that can take your business to the next level. So should you add this person to your existing LLC? If you decide the answer is yes, how do you legally add them as a member?
What Are LLC Members?
If you've already formed your company as an LLC, then you may or may not have other"members" listed in your Articles of Organization. Members are basically co-owners in an LLC who have a set percentage of the company. Unlike corporations, LLC members aren't required to have specific titles or divided responsibilities (such as shareholders, directors, and officers). However, you most certainly can assign titles and responsibilities to your members — though LLCs allow more flexibility in this area than corporations do.
Why Should You Add a Member to Your LLC?
There are a variety of reasons why you may want to add a member to your LLC. Here are a few questions to ask yourself first:
Is everyone on board with this decision? How do your current members feel about adding a new person to the LLC? Will this new member complement or compete with the existing team?
What does this person have to offer the company? Will dividing the profits and adding another decision-maker complicate matters or add value?
What will this person's specific role be in the company? Is it purely a financial investment, or will they be given a certain task to perform (which should be clearly stated in the Operating Agreement)?
Does this person understand and agree to what will be required of them in regards to time and commitment level?
Adding LLC Members
So now that we know what an LLC member is and what their role can look like, how do you go about adding one to your company?
1. Check Your Operating Agreement
Not all states require that LLCs have an Operating Agreement, but it certainly is helpful to create guidelines that everyone agrees upon to run the business efficiently. If you do have this document, check it to see if you have procedures outlined for adding another member. For example: Do you need a unanimous vote from existing members? What percentage of the company can be sold to a new member?
2. Check the Requirements of Your Secretary of State
Visit your secretary of state's website to see if you'll need to report this change, and if so how you'll need to do it. For instance, some states require that the Articles of Organization list all an LLC's members. This would mean that you would need an Articles of Organization amendment form, such as California's form LLC-2. However, other states only require an annual filing that lists the company's current members. Since each state is different, it is critical to find out what the appropriate actions are based on where you'll be conducting business.
3. Decide Which Type of Member LLC to Use
If you were a single-member LLC, you may need to indicate on your state amendment forms how your LLC will now be managed. There are different types of member LLCs that determine how the members will run the company:
Single-Member LLC: This is an LLC with only one member. If you were a sole owner, then you had this type of LLC. Note that this differs from being a sole proprietor with no formal legal structure — an LLC protects your personal assets and allows for easier transfer of ownership upon death, retirement or disability.
Multiple-Member LLC: This is an LLC with more than one member. As opposed to a single-member LLC, this entity requires careful consideration when creating the LLC Operating Agreement so the rights of each member are clearly outlined. This is critical in case the company folds or there is a disagreement among the members.
Member-Managed LLC: This is the most common type of LLC, in which all members share equal responsibility for operating the business. However, you may choose to have a manager-managed LLC where a manager is assigned; this could be a member or non-member. This structure is for companies where certain members may want to take a more passive role and don't want to be involved in the daily decision-making process (such as a financial investor).
4. Contact Incfile
Since each state has different requirements, your best bet is to contact Incfile. Our business experts are available to talk through these important decisions with you and guide you through the legal process of making these changes. We can help you to decide which type of entity is best for your business if you're just starting out, and we can fill out and file the correct forms with our amendment filing services if you're ready to make a change. We also offer lifetime customer support with all of our business packages. Your business is ever-changing and growing, and Incfile provides the services and resources to help you every step of the way.