How to Add a Partner to a LLC Using Sweat Equity

By Jeff Franco J.D./M.A./M.B.A.

The existing members of a LLC have great flexibility to establish the procedures for the admittance of new members. As long as the LLC operating agreement doesn´t prohibit it, new members can join the LLC on the basis of "sweat equity," rather than having to contribute cash or property to the business. This means that a new member promises to perform services in exchange for an ownership interest in the LLC.

Step 1

Check the LLC operating agreement. If the LLC has an operating agreement, it will likely include a clause that outlines the procedures for admitting new members who contribute sweat equity.

Step 2

Establish terms of the new member’s interest. The LLC structure is quite flexible in that the rights of each member need not be the same. Therefore, you must reach an agreement with the prospective member as to his percentage of ownership, rights to distributions and allocation of profits.

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Step 3

Obtain consent from current members. If the operating agreement is silent on the procedures for admitting new members, the laws of the state in which the LLC operates will apply by default. Most states require that all current members of the LLC consent to the admission of a new member; however, the operating agreement may not require all members' consent.

Step 4

Draft a contract with the new member. The new member’s promise to provide sweat equity to the LLC should be written in a legally enforceable contract. A valid contract must outline the type and length of service the new member is promising, all terms that relate to the new member’s share of profits and distributions, and the signatures of the new member and a current member or manager who is authorized to sign for the LLC.

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References

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Illinois LLC Operating Agreement

Illinois state statutes 805 ILCS 180 Limited Liability Company Act Sec. 15-5 defines the operating agreement as the agreement concerning the relations among the members, managers, and limited liability company. Illinois statute permits, but does not require, the members of an Illinois limited liability company to enter into an operating agreement. If created, the operating agreement can generally contain any terms and conditions that do not conflict with the Illinois Limited Liability Company Act.

Can a Business Own Part of an LLC?

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