How to Add a Nonvoting Investor to an LLC

By Larissa Bodniowycz, J.D.

How to Add a Nonvoting Investor to an LLC

By Larissa Bodniowycz, J.D.

In a limited liability company (LLC), any member who makes financial contributions to the company but has no say with regard to its daily management is a nonvoting investor. Nonvoting investors are usually brought in by LLC member managers who are looking to bring in additional capital while maintaining control of the company.

Adding a Nonvoting Investor to an LLC

To add nonvoting investors, the company must be a manager-managed LLC. You can add a nonvoting investor to a company initially structured as a member-managed company by amending your management structure and coming to an agreement with the investor. The following steps discuss what you need to do to add a nonvoting investor to an LLC.

1. Check to see whether your operating agreement allows nonvoting members.

The first step is to review your LLC's operating agreement. To add a nonvoting investor, the operating agreement must allow for a nonvoting class of members. If it does not, you must amend it. The operating agreement states the rules for amendments. Typically, you must take a vote among the current members to add a nonvoting class. You should also confirm that your state allows nonvoting members in any LLC prior to amending your operating agreement.

2. Amend the LLC operating agreement and articles of organization.

Amend your operating agreement and articles of organization to reflect the change in your LLC's management structure. Your updated operating agreement should list the names of the members who have management roles. It should also reflect that certain classes of members lack voting rights and have only economic interest in it. The updated agreement should provide procedures for issuing nonvoting membership interests. Once you draft the changes, follow procedures in the original operating agreement for voting on and approving the amendment. Your state may also require you to file the amended articles of organization.

3. Negotiate with the nonvoting investor.

Negotiate terms with the new investor, and clearly define the investor's role in the LLC's day-to-day affairs. You must decide on what share of profits the investor will receive, what the LLC's profit and loss allocations will be, buyout procedures in the event the investor wants to pull out, and the powers and duties of the investor. Your investor will likely want to have some say in the operations process. You might need to grant the investor very favorable profit allocations or other perks in exchange for limitations on their ability to influence the management and day-to-day operations.

4. Enter into an agreement with the nonvoting investor.

To complete the process of adding a nonvoting investor to your LLC structure, draft an agreement formalizing your terms with the investor. Each member should sign this agreement. Detail any limitations on the investor's ability to manage the company and vote, and confirm them in writing.

A nonvoting investor can bring a big boost of capital to your LLC, but be aware that this move could also trigger the application of certain securities laws, particularly if the investor has no participation in the key decision-making functions of the business. Consider seeking the advice of a knowledgeable business law attorney to make sure you maintain compliance with all applicable financial regulations.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.