A limited liability company, or LLC, is managed like a partnership rather than through a regulatory framework. It requires the consent of the partners, known as members, to accomplish anything. Members can execute an operating agreement to govern the procedure for making most decisions, but an operating agreement is optional in most states. Some states have default provisions in their Limited Liability Company Acts that dictate how certain situation are to be handled if an LLC hasn't formally adopted an operating agreement. The addition of new members falls under these default provisions.
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Draft and execute an operating agreement if the LLC doesn't already have one in place. Most states provide that the addition of a new member, when there is no operating agreement in effect to establish different rules, requires the consent of all existing members, and makes the new member an automatic equal partner in the company on the same level as the existing members. An operating agreement can change those rules, allowing, for example, for new members by a simple majority vote and for ownership interests that are less than equal to the interests of other owners, such as a 40-40-20 distribution.
Vote to add a new member. An LLC is operated by consent of its members, particularly in regard to adding new members. You cannot unilaterally force other partners to allow the dilution of their ownership interest by adding a new member -- the partners must explicitly agree. If you have an operating agreement, the vote must be in accordance with the agreement. If there is no operating agreement, the vote must comply with the state's LLC Act, which typically requires 100 percent consent.
Collect the new member's capital contribution. Determine how much of an interest the new member will have in the company and how much the interest will cost to acquire. Every LLC member must have a capital account that represents that member's equity contribution to the company in the form of money, property or services. If there is no operating agreement, the new member is automatically accorded an equal share of the company as all other members, regardless of his capital contribution.
Adjust company records. The company must keep accurate records of its members and each member's capital account. Amend the company's operating agreement to add the new member, and add the new member to all other company lists and records of ownership.
Amend state filings, if needed. Some states require that an LLC's articles of organization list its members. Other states require an annual filing that lists the company's current members. Check your articles of organization and the state website to see if this applies in your state.
References & Resources
- Business.gov: Limited Liability Company
- FindLaw: Making LLC Operating Agreements
- Citizen Media Law Project: Limited Liability Company
- Citizen Media Law Project: Operating Agreement
- Uniform Limited Liability Company Act
- SCORE: Business Tools
- U.S. Small Business Administration: Small Business Planner
- ABA Family Legal Guide: Forming and Operating a Small Business
- The 'Lectric Law Library: Business Entity Forms
- FindLaw: Start-Up Toolkit
- Jupiterimages/Photos.com/Getty Images