Who knew that owning a business could be so tricky? Being in charge of making everything happen can be stressful, especially when dealing with financial difficulties. Having a limited liability company can save you multiple headaches that you will suffer as a business owner under challenging times.
We made this simple guide for you to learn everything about LLCs and how to add members to them effortlessly. Therefore, if you want to protect your assets, keep reading and find some handy legal advice about adding a business partner to your LLC.
What Is an LLC?
A limited liability company is a business structure that you can make in the U.S. to protect yourself and your assets from having any personal damage due to your business’ possible financial problems. LLCs work as hybrid entities, as they mix the traits of a corporation with those of a partnership.
The limited liability characteristic is similar to those you see in corporations. Still, the flow-through taxation for its members is a lot more like the ones you see in partnerships.
Main Characteristics of an LLC
- It protects the company owners from being personally persecuted for their debt.
- Their regulations vary from state to state.
- Any entity or individual can be part of an LLC, except banks and insurance companies.
- They don’t pay taxes directly, as they pass their profits and losses through their members, who individually report their taxes.
- It requires to fill articles of organization with the state
- It’s easier to set up and more flexible than corporations
Forming an LLC
The requirements you need to follow for creating LLCs change depending on the state. However, there are some generalities that you can find among them. Firstly, you are going to need to choose a name.
Then you need to fill and document your articles of organization with the state. They settle the rights, duties, powers, obligations, and liabilities of every member of the LLC and their names and addresses. These articles also include the name of the agent and the statement of purpose of the business.
Once they are filled, you must pay a fee to the state and submit any extra paperwork to a federal level. Then you may obtain your employer ID number.
LLC Pros & Cons
If you want your business to become an LLC, you must know everything about them, including their positive and negative sides. Check out their pros and cons down below.
- Members aren’t liable for the company’s actions, and their properties are protected.
- Facilitates the process of filing taxes and can even lower the tax burdens
- It allows management flexibility from either the members of the LLC or a hired professional
- The process is simple, and anyone can do it
- They may have to dissolve if one of the partners dies or goes into bankruptcy.
- Not suitable if you want to launch a publicly-traded company
- Their members must pay self-employment tax
How to Add a Member to an LLC
LLCs started to peak in popularity among American business owners in 1997. Since then, many companies have been seeking to upgrade their benefits by adding new members to their pre-existing LLC.
However, this is a significant change to the LLC structure, and it requires plenty of modifications regarding taxation and the operating agreement, but it is not impossible to do. Hence, if you’re looking to add a new partner or investor that will help your company escalate as much as you want to, we’re here to tell you exactly how to do it.
Lucky for you, it isn’t too hard of a process, but it does need to be done correctly. If you were smart enough to include this process in the operating agreement, you’re halfway there; if you didn’t, don’t worry, follow your state’s provisions, and you’re good to go.
The best part is that adding or changing members won’t affect your company’s status as it is seen as an individual entity to the state.
Understand the Consequences
If you’re in a single-member LLC, the transition of adding a new member will be a lot easier than if you were already in a multi-member LLC. However, all members would have to meet and agree to add the new partner in those cases, which can become a little messy.
However, there are some aspects to keep in mind when adding a new member to an LLC. Would they be suitable in terms of values and personality for your company? Have you assessed the risks? Are they going to help your company grow and add value? What would their responsibilities be?
It would be best if you found an answer to all of these and any other questions that might pop up before making the final choice.
Review Your Operating Agreement
Your LLC’s operating agreement should have all the needed steps for including a new member. Nonetheless, if you don’t have one, most states only need a majority vote of the current members in the LLC.
Keep in mind that every operating agreement could state different rules, and they are the ones that you should follow as they dictate what was once agreed between all parties.
Settle the New Terms
In most cases, the ownership stake should correspond with the amount of money the new member will invest in the company or the service it is going to provide. However, this doesn’t apply to all cases.
The new structure is also something to consider. For example, you could have a member-managed LLC, in which each LLC member has the same amount of responsibility, or a manager-managed LLC, in which you choose a manager that could or not be an LLC member.
Vote to Update the LLC’s Operating Agreement
Now it’s time to legislate your new operating agreement, which should reflect all of the new member’s responsibilities, ownership, and financial contribution. This should also be signed and dated by all of the LLC’s current members. If you still don’t have an operating agreement, all members must unanimously agree to the new terms.
Make the Update Official
Write the new operating agreement with all the necessary clauses that state all members’ responsibilities, legal representation, capital contributions, shares, rights, ownership structure, and percentage of losses and profits. This procedure is needed to avoid future disputes between the members.
Update the Articles of Organization
Remember all the paperwork you had to fill when you created your LLC? Those included your LLC’s articles of organization, and when adding an LLC member, they may need to be updated depending on your state’s rules.
File a Tax Form
When LLCs have multiple members, the IRS considers them as partnerships. However, if you want to be perceived as a corporation, you must file Form 8832. Don’t hesitate to ask for help from your trusty law firm or tax accountant.
Register a Name Change
It is not advised to change the name of the company. Nevertheless, if you see yourself forced to do so, you must notify the IRS and your secretary of state. This is the last loose end that comes with adding a new member to your LLC, so you’re closer than ever to being able to rest calmly and out of trouble.
Q: What Is the Difference Between a Limited Liability Company and Partnership?
The main difference between these two kinds of companies is that in LLCs, the members don’t have personal liability, and their goods are separated from the business. This insulates the owners from the LLC’s financial consequences.
However, both companies can pass their profits and tax responsibilities to their owners, and their losses only affect the amount invested. Moreover, LLCs might dissolve if one of its partners dies; this can be avoided by signing a business continuation agreement between all parties.
Q: What Are the Direct Consequences of Turning a Single Member LLC to a Multi Member LLC?
Turning your LLC to a multi-member LLC by adding a new member has some consequences that you should take into consideration before making the decision; some of them are:
- You are going to be splitting the profit of the company
- All the business decisions must be made as a team now
- Your business is no longer allowed to do disregarded entity taxation
However, adding a member to your LLC now will be easier than trying to add more in the future, as you don’t need to persuade anyone to do it.
Choosing to add a new member to your LLC is a massive step for your business, but it shouldn’t be difficult with the proper guidance. All you have to do is pay special attention to the operating agreement and the terms of ownership. Then, make sure to do all the appropriate paperwork, educate yourself about it, and you’re ready to take your business to the next level.
If you need any help, please check out our services on our website; we’re more than happy to guide you through everything.