There are many exciting moments in the life of a limited liability company (LLC) owner. Getting your business off the ground is a rewarding process in itself, and it’s always fulfilling to see the first few checks from your clients coming in. But in our opinion, the best part of owning an LLC is when your business begins to grow and expand.
As your business increases its reach (and its financial capabilities), you may begin to consider adding a member/owner to your LLC. Adding a new member can help in several different ways. For one thing, you’ll have one more person to help you develop your business. In addition, new members often bring with them an influx of capital, increasing your company’s financial resources.
But how does the process of adding members to an LLC actually work? And is there a difference in the way adding a member works in a single-member LLC as opposed to a multi-member LLC? In this article, we’ll answer these questions and more, as we discuss all the relevant details of adding members to LLCs.
What Is an LLC?
A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds. LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
A single-member LLC is a business entity with just one owner operating the company. There may be employees in a single-member LLC, but there cannot be more than one member running the show. The single-member LLC is the most popular alternative to the sole proprietorship, as it is a more formal way to organize a one-person business, while obtaining the personal asset protection that a sole proprietorship lacks.
A multi-member LLC is exactly what it sounds like — it is an LLC with more than one member. Much like the single-member LLC is a popular formal alternative to a sole proprietorship, the multi-member LLC gives business owners and their partners the opportunity to acquire personal asset protection, while still not adhering to the rigid formalities of a corporation.
When Should I Add Members to an LLC?
There are a few circumstances when an LLC might want to add new owners. For single-member LLCs, you can get to a point where it’s simply too much work for you to run the business by yourself. In this scenario, adding a member can dramatically reduce your stress and workload by essentially splitting all your ownership duties in half.
Another scenario is if your business needs a significant influx of money. It’s nearly impossible for LLCs to attract investors because they aren’t allowed to issue stock, so the best way to bring in a big windfall of external investment is often to offer someone an ownership stake in the company.
Of course, there are some drawbacks to adding new members to an LLC as well. The biggest negative is the fact that you will now have an additional person to split profits with. Even if the new owner has a smaller cut of the profits than you and/or your other members do, they will still take a significant chunk out of the money you have available.
Additionally, if your business is member-managed rather than manager-managed, you will now have an additional person involved in the daily operations of your business. While in some situations this can be a positive, we’ve also heard of plenty of situations where adding another voice to the management team is counterintuitive.
How Can I Add Members to My LLC?
The first step is to consult your LLC’s operating agreement. When you first formed your company, you should have outlined a procedure for adding (or removing) members from your business. Whatever that process is, you should follow it to the letter. For many businesses, this means holding a formal vote of your owners to confirm the new member.
The next part of this process is to check with your Secretary of State’s office to figure out if there are any formal documents you need to file to reflect the change in ownership. This part varies by state, so it’s hard for us to say with any level of confidence that you will or won’t need to do it, but many states do require you to amend your articles of organization to make the new member official.
In some states, you may need to indicate your ownership change in an annual filing as well, like Nevada’s annual list requirement. This is a filing that requires all businesses to list all of their members and managers, so it’s obviously a resource where you would need to reflect your ownership change.
Overall, the process for adding members to your LLC — whether it’s a single-member or multi-member business — isn’t all that complicated, even in states with some additional requirements. But you do need to make sure you complete each step correctly to avoid losing your good standing with your state government.
There are several good reasons to add a member to your single-member or multi-member LLC, but keep in mind that this isn’t a decision that should be taken lightly. After all, adding a member to an LLC is a semi-permanent move — if it doesn’t work out, getting rid of a member is much more work than adding one.
Our big piece of advice in this article is that you need to check with your Secretary of State to see if there are any required steps for adding a member, beyond simply updating your LLC operating agreement. You wouldn’t want to miss a crucial step only to find out later that you lost your good standing due to an easily avoided mistake.
We hope this article helped you improve your understanding of adding members to a single-member or multi-member LLC!