Adding a nonvoting member to your limited liability company may be an opportunity to bring in more investors while maintaining control over your business. An LLC is a business that provides the limited liability of a corporation, with the management structure of a partnership. The state law where your LLC is located will determine how the company is formed, and how the LLC may be managed. State laws may be similar, but some states do not allow for nonvoting members.
Fit your business needs with the right LLC package
Request a meeting with all the members of the LLC responsible for making management decisions. Unless otherwise specified in your operating agreement or articles of organization, all LLC members have a say in the management structure of the LLC, and there must be a consensus before making any major changes. Contact all the appropriate members to schedule a time and place to meet.
Amend the operating agreement to create a nonvoting class of members. At the LLC meeting, have all the members who are responsible for making management decisions vote, by a show of hands or on paper, in favor or against making changes to the operating agreement. All LLC members must agree to make the change, unless otherwise specified in the agreement.
Amend the operating agreement and the articles of organization to reflect the vote. Your LLC will now be a manager-managed company, meaning only certain members have the authority to vote in business matters and make decisions on behalf of the LLC. Change your operating agreement to state that it is now manager-managed, and state which members may make decisions on behalf of the company. If you initially organized your LLC as a member-managed company, in most states, you are required to amend the articles to show the change in management structure. Contact your state's secretary of state to find out your requirements or enlist the aid of an online legal document preparer.
Negotiate a price with the investor to buy into the company. In negotiating the price, flesh out the investor's share of profit distributions, profit and loss allocation, access to capital, and any other potential perks of becoming a nonvoting member of the LLC.
Draft an agreement and have all the members and the investor sign the agreement. The agreement should include information about the investor's ownership rights, the amount of investment, right to disbursements and allocations, and legal compliance. Use this opportunity to clarify that you are all on the same page about the investor's nonvoting role in the LLC.
Change the company's records to reflect change in management. Some states may require LLCs to update the public record of the LLC's management and include the new nonvoting member. Additionally, you may be required to update your state's department of taxes about the management changes.
References & Resources
- National Conference on Commissioners on Uniform State Law: Uniform Limited Liability Company Act
- American Bar Association: Common Mistakes and Oversights When Drafting and Reviewing LLC Operating Agreements
- Small Business Administration: Working with Investors: Four Steps to Set Ground Rules
- Texas Secretary of State: Management and Ownership FAQs