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.
As mentioned above, the terms of how to incorporate new members should be thoroughly discussed and documented. The scope of the membership admission agreement is limited to how new members are introduced and incorporated into the company. This membership admission agreement is not used to change the LLC's operating ground rules.
Admitting new members to your LLC may involve changing, updating, or revising part of the operating agreement. You may easily achieve this through LegalNature's LLC operating agreement amendment form. If the LLC does not have an operating agreement in place, we highly encourage the LLC to create one now with LegalNature's LLC operating agreement. These documents will ensure that your LLC continues to operate in the way it is intended by the owners.
Include the state where the LLC is registered. This is the state where the LLC filed its original articles of organization or other equivalent formation document. This is not the state where the LLC is considered a foreign entity, even if the LLC may be required to register with those states as well.
For example, if an LLC registered as a domestic company in New Jersey and subsequently opens an additional office in Texas and applied to operate in Texas as a New Jersey company, New Jersey would be the registered state. In this example, Texas is the state where the LLC operates as a foreign company and has permission to do business there.
This agreement references the company's original operating agreement and all its amendments since all members affirm their agreement to abide by the company's operating agreement. The purpose of referencing the effective date of the original operating agreement is to clearly identify the correct documents and terms that all members are contractually obligated to uphold.
To clearly identify the original form of the operating agreement, enter the date your initial operating agreement was entered into, and then determine the date this agreement will go into effect.
The LLC's membership and its associated ownership interest should always be kept up to date. Instead of making confusing piecemeal changes to your document, this membership admission agreement is designed to gather all membership information in one place for a clear and concise overview of the LLC's ownership structure. As adding new members is a change in the membership composition and contribution, make sure to enter all members, their respective contributions, and their respective ownership interests. Include all current members and newly admitted members, but exclude the information of any member who has been removed.
For ownership units, an LLC may choose to create different classes of units, shares, or stocks for newly admitted members. If applicable, enter all unit classes and each member's associated ownership number of those specific unit classes. For example, if there are Class A and Class B shares issued for the same member, you may enter "10,000 Class A Shares and 500 Class B Shares."
One of the terms new members and current members must agree on is the payment or transfer terms of new members' contributions, if any. This establishes the timing and amount of contributions that the company can expect to receive as the infusion of capital, asset, or talent and plan its business strategy and operations accordingly.
This agreement's default position is that new members' contributions are payable upon execution of this membership admission agreement. However, if new members' contributions to the company will be made in multiple installments over a period of time, this should be articulated in the agreement. For example, the payment terms may be divided into five equal payments due on the last day of each month. Alternatively, the payment terms may also consist of a list of due dates with different payment amounts associated with each date.
As with other types of investments, there are rules and regulations for the company and members to abide by. One such rule for LLCs treated as S corporations for tax purposes is that owners of the LLC must be United States citizens or residents pursuant to IRS Code Section 7701. Therefore, if your LLC is treated as an S corporation for tax purposes, every new member will acknowledge that they are U.S. citizens or residents pursuant to IRS Code Section 7701 and will notify the company if their residency status changes, as this affects the company's tax status. Please consult an attorney or tax specialist if you have any questions about the LLC's tax treatment or the new members' residency status under IRS Code Section 7701.
Another rule for investments into companies is that if a company sells interest in the company to a limited number of people, defined as "accredited investors" according to the Securities Act of 1933, Regulation D, Rule 501, then the company does not need to register the securities offering with the United States Securities and Exchange Commission (SEC). If the company's new members qualify as accredited investors, this should be represented and acknowledged so the company can rely on the acknowledgment for any required compliance with the SEC.
Please note that even when new members are accredited investors and the LLC may be exempt from registering the securities offer with the SEC, the company may still need to file "Form D: Notice of Exempt Offering of Securities" with the SEC. You can find more information below in the Final Steps under the section titled: 'File Form D "Notice of Exempt Offering of Securities" with the SEC.'
New members generally prefer the company books to accurately reflect their additional contributions and interests in the company immediately after the transfer of the new members' contributions. Indicate whether the company will update the accounting books to immediately reflect the infusion of funds from the new members.
New members can also negotiate how their contribution will be applied and used by the company. If the new members and the current members agree on the specific use of new members' contributions of money or other assets, then this should be specified in the agreement for each member. The application of any and all proceeds toward specific uses will appear in Exhibit C: Application of Proceeds of Sales of Interest.
LLC documents generally do not require notarization as part of its execution formalities. However, notarization may be a requirement under your LLC's operating agreement as a first line of defense against fraud. It could also be required from third parties, such as banks with their own signing and witness policies.
Insert a copy of the company's ownership structure as it stood before any new member was admitted. This generally includes all members' names, contribution descriptions and values, and interest units and percentages in the company. This information can usually be located in your operating agreement, in company resolution records, or in a previous membership admission agreement.
This exhibit compiles all ownership and members' contribution interests in one place for an overview of all the LLC's owners. Refer to this exhibit to see what and how much each member contributed to the company and how much of the LLC is owned by each member in return for their contributions.
This exhibit details any agreement between the company and all members on how to use specific contributions from members. For example, if a member contributed money and all parties agree that this member's money can only go toward a certain project, such information would be specified here. If the members do not have any stipulation and agreement on how to use their contribution and allow their contributions to be used in any way the company sees fit, the "Specific Use of Member's Capital Contribution" column in this exhibit will indicate "N/A."
This exhibit details the payment terms for new member's contributions for an easily accessible chart on the LLC's expected contribution influx.
Insert the company's effective operating agreement and all applicable amendments here. This ensures that all members, current and new, have a copy of all operating procedures for the LLC and can refer to it if any questions should arise.
An LLC does not have very many company formalities, but adding new members is a significant change in ownership structure. It is advisable for the current members of the company to take an official vote and pass a resolution to admit the new members. You can use LegalNature's corporate resolution form to easily and professionally document this resolution for the company records.
Certain states require an amendment to the LLC's articles of organization (also known in other states as a "certificate of formation" or "certificate of organization") filed with the state when new members are admitted. Be sure to check with your Secretary of State or the equivalent state agency to determine whether your LLC needs to update its articles of organization with the new members' information. States generally do not require the actual membership admission agreement to be filed with the state.
If this membership admission agreement changes your LLC from a single-member LLC to a multi-member LLC, and you have been operating the LLC under your own Social Security number for tax purposes, then you should apply for an Employer Identification Number (EIN) after the new members are admitted. As a single-member or single-owner LLC, you can hire and operate under your own Social Security number. However, with multiple owners of the LLC, the LLC requires its own EIN that is separate from the owners' personal identity for tax purposes. You can apply for an EIN from the IRS directly on the IRS website.
Under the Securities Act of 1933, any offer to sell securities or interest in companies must either be registered with the SEC or meet one of the three exemptions listed under Regulation D of the Securities Act, Rules 504 to 506. You should consult an attorney or the SEC if you have any questions regarding your company's offering and whether it falls within the exemptions.
For most small businesses, it is likely that it will fall within one of the exemptions to SEC registration. If so, the small business does not have to register its securities offering with the SEC. However, the small business is still required to inform the SEC of the reasons for the company's exemption. Exempt LLCs still must file a Form D "Notice of Exempt Offering of Securities" electronically with the SEC within 15 calendar days after the LLC first sold its securities.
Form D is a brief notice that includes the names of the company, owners, and officers as well as some broad strokes about the offering. It does not include information about the company's detailed finances. Form D can be found here. Also, a helpful guide on how to file Form D can be found here. You may also search the SEC EDGAR database for Form D filings by other small businesses for samples on how to complete and file Form D.
More and more states are mirroring the SEC by requiring notice of securities offerings from small businesses. The LLC should check with its state securities regulator for the current state requirements. The SEC directs small businesses to get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202)737-0900 or by visiting its website.
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.
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:
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.
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.
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:
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.
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.
As you complete your LLC membership admission agreement, you will need to provide certain relevant information. This primarily includes member names and ownership percentages.
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.
It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. 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.
Although using a notary is not required, it is recommended that you do so to ensure that you can prove the authenticity of the document. When using a notary, be sure to wait to sign the document until he or she is present.
At a minimum, all parties that sign the document should receive a copy once it is fully executed (everyone has signed). Other interested parties may need or want copies as well. Be sure to store a copy in your company records book and keep it in a safe location. It is a good idea to keep both a physical and electronic copy.
Admitting new members to your LLC often requires changing, updating, or revising part of the operating agreement. You can accomplish this through LegalNature's LLC operating agreement amendment form. If the LLC does not have an operating agreement in place, we highly encourage the LLC to create one now. This document is essential for protecting the company and its owners from a host of common disputes and legal dangers.
It is usually recommended to require members to sign a confidentiality agreement. This prohibits them from disclosing confidential company information to others outside of permitted business uses. Doing so helps ensure that the company's intellectual property, trade secrets, and other private business information stays within the company.
Over time you may need to make changes and updates to the agreement, such as to accommodate additional members or changes in company policy. You can do this either by using a simple contract amendment or by creating a new LLC membership admission agreement. A contract amendment is more helpful when you only need to make a few minor changes to the agreement, while creating a new agreement is typically used to admit new members or make more significant modifications. LegalNature makes creating a new agreement easy by saving your answers to the original agreement within the document questionnaire.