Why would an LLC decide to add members?

An LLC may be set up by a single person, by multiple people, or may be owned by a combination of individuals and entities. In some cases, the LLC owners wish to take on additional partners or offer equity in the business to additional investors. It is important to note that the process is not the same for members who wish to transfer their existing membership in the LLC to a family member, another partner, or business entity. In some instances, the LLC members may wish to reward an employee who has been particularly helpful to them by offering them an equity position in the company, which also precipitates a change to the LLC membership.

How does an LLC add new members?

Typically, when an LLC is formed, the operating agreement or articles of organization specify how new members may be added. Unlike single-member LLCs, which naturally hold no votes, multi-member LLCs require a vote of unanimous consent by all members in order to add a new member. The normal steps for adding new members is as follows: Review the operating agreement and articles of organization Review your state’s requirements on your state website Notify all current members of the upcoming vote Determine the buy-in amount and profit sharing plan for the new member (this may be included in the operating agreement and is normally voted on by existing members) Hold the full vote of the membership according to the operating agreement Draft and sign an LLC membership admission agreement clarifying the new members' rights and obligations Draft an amendment of the operating agreement and articles of organization reflecting new members, as necessary File the amended documents with your state, if required (typically done through the Secretary of State) Notify the Internal Revenue Service (IRS) of updated members and file any required tax forms

Does the LLC need to update its operating agreement when adding new members?

When adding a member to an LLC, it is imperative that an amendment to the operating agreement is drafted. The amendment must also be signed by all owners of the LLC. The amendment, along with the operating agreement, should then be used as the current legal ownership document of the company. This amendment may need to be filed with the state depending on the state law where the LLC was formed.

Who are the owners of an LLC?

LLC owners are referred to as “members.” The operating agreement typically lays out the responsibilities of the members. While other corporate structures may limit the number of shareholders or place other restrictions on the owners, LLCs have no such limitations. LLC owners may be individuals, but need not be residents of the United States. Members may also be other business entities, such as partnerships, other LLCs, or corporations. While other corporate structures may be required to adhere to certain corporate formalities, such as holding an annual meeting or recording meeting minutes, many of these formalities are optional for LLCs. However, many states require LLCs to file annual reports in order to maintain their good standing; this makes it important for LLC owners to regularly review their state’s requirements to ensure that they are in compliance. While a standard C corporation may be subject to double taxation, an LLC is taxed like a partnership if there are multiple members and as a sole proprietorship if there is only one member. The owners of an LLC may choose to file a special election with the IRS to be taxed as a corporation. Another important consideration of an LLC is deciding who manages the day-to-day business operations. In either the articles of organization or the operating agreement, an LLC may designate the manager of the business. LLCs may be “member-managed” or they may be “manager-managed.” In most cases, manager-managed LLCs are used when the members prefer to be passive investors in the business.

Why do new LLC members need to review the LLC operating agreement?

The LLC operating agreement contains vital information that every new member should familiarize themselves with before agreeing to be a member. Some of the issues that are addressed are as follows: Contributions – What contributions were made by each member, and are there future expected contributions? If there are future contributions, when are they due and what happens if they are not made? Profits and losses – The operating agreement should specify how profits and losses are allocated among the members. Stock ownership – Since an LLC is allowed to designate multiple classes of stock, there should be information about stocks and what preference is given to each class upon making distributions or a liquidation of the LLC. Management of the LLC – New members should be aware of whether the LLC is being managed by all members, by a sole manager, or by a group of managers. Officers – It is imperative for new members to understand how the officers of the company are appointed, as this differs greatly between LLCs. Voting rights – Before agreeing to membership in an LLC, a member should review the operating agreement on how voting for major events is handled, such as the sale of the business, changes in membership, and any capital contribution requirements. Indemnification – Operating agreements typically contain language specifying what indemnification protections are offered for anyone who is handling the management and operations of the business. Transfers – It is important for incoming members to understand any restrictions on transfers of membership interests (or units). Transfers may occur when a member wishes to divest its interest, after the incapacitation or death of a member, or when the other members vote to remove a member. Common procedures – Reviewing the procedures for conducting member meetings, dissolving the business, and other common actions that may be taken by the LLC will provide new members with a thorough understanding of their rights and obligations.

Does an LLC need an EIN if there are multiple members?

The IRS treats single-member LLCs as sole proprietorships by default. Single-member LLCs are not typically required to have an Employer Identification Number (EIN) unless they have employees or are required by the state to file an excise tax. Note that they may still request an EIN if desired for tax reasons. When there are multiple members, the LLC is required to have an EIN. Keep in mind that LLCs also have the option to be taxed as a corporation. Single-member LLCs must apply for an EIN when adding a new member. If the company already has an EIN because there are multiple owners or because the owner has taken the steps needed to obtain an EIN, then Form 8832 must be filed with the Internal Revenue Service (IRS). This is to ensure that the IRS has an accurate record of the owners.

Does an LLC need to file its membership admission agreement with the state?

Each state has different rules regarding which documents the members need to file with the state. Generally, most states do not require a company to file their operating agreement or membership admission agreement. While these agreements must comply with state rules, they are usually considered internal documents and should be stored safely. An LLC that has a registered agent should make sure the registered agent has an updated copy of the membership admission agreement as well as any addendums or amendments to the operating agreement. Depending on the state in which the LLC is formed, you may be required to file the membership admission agreement and/or report the changes on your annual report. It is important that you follow the appropriate rules for your state as well as make the required changes with the Internal Revenue Service (IRS). In many cases, these reporting requirements must be met at the time changes are made, but certainly no later than the end of the fiscal year of the LLC.

LLC Membership Admission Agreement

An LLC membership admission agreement is used to officially bring new members on board as company owners.

This will assure that your growing LLC stays compliant and operates smoothly.

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When to use an LLC membership admission agreement

You need to add new members
To stay compliant with federal or state regulations
You need to update member contributions and payment terms
To ensure all members are protected from taking on personal liability for company debt

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How to create an LLC membership admission agreement in 3 steps

Gather Information

As you complete your LLC membership admission agreement, you will need to provide certain relevant information. This primarily includes member names and ownership percentages.

Answer Key Questions

Use the information you collected to complete the LLC membership admission agreement. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.

Review and Sign

Every LLC member needs to review and sign a separate signature page in order to acknowledge that they understand and accept the changes. Each party should consult with an independent attorney or financial advisor if questions should arise. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard.

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An LLC membership admission agreement officially inducts new members into the company's existing ownership. New members must agree to abide by the terms and conditions articulated within this membership admission agreement and the company's operating agreement. New membership admission should always be carefully and thoughtfully negotiated by all parties, as adding new members may drastically change the existing dynamics and operations of the company. On the one hand, adding new members is a method for raising capital, bringing in new assets, and absorbing new talent and expertise. On the other hand, the new members may require changes to company operations that differ from the existing framework established in the company's operating agreement. This membership admission agreement will guide your LLC through documenting the admission portion of the new membership induction where all members, current and new, agree to this ownership addition.