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6 Steps for Adding New Members to an LLC

When adding an LLC member, business clients need your guidance on handling the change legally and for tax purposes. Here, Nellie Akalp, CEO and founder of CorpNet, shares six basic steps for adding a new member, including what to do if the LLC members decide to file for S Corp election for taxation.

There could be a number of reasons why your business clients may want to add new members to their LLC. Perhaps they need funds and have decided to bring on additional owners for their financial investment. Maybe they want to expand their LLC’s services and feel the best way to do that is to onboard new members who have the specialized expertise to make that possible. Regardless of the circumstances, there are procedures for handling the change legally. Your clients should discuss the change with an attorney and tax professional (that’s where you come in!) so that they understand the requirements—and the ramifications—of making such a significant change.

Let’s discuss some general considerations that business clients should consider when bringing on new LLC owners.

Six Basic Steps for Adding a New LLC Member to an LLC

1. Review the LLC Operating Agreement

Even if an LLC has just one member, it must follow the company’s operating agreement’s provisions for adding a new member. An LLC operating agreement is a legal document that governs how the company is operated and managed. It sets forth how members must handle important decisions and changes. 

2. Review the State’s LLC Rules

While this is particularly important when an LLC has no operating agreement in place, it’s helpful for all LLCs to review their state’s laws. If an LLC operating agreement fails to sufficiently address rules for adding new members, the LLC may have to follow the state’s regulations. In some cases, they may need to dissolve the existing LLC entity and form a new one when adding a new member.

3. Propose to Amend the LLC Operating Agreement with the New Member’s Information

Generally, that information will include:

  • The member’s name
  • Financial contribution to the LLC
  • Member’s ownership share in the company
  • Member’s distributive share of the LLC’s profits and losses
  • Member’s role and responsibilities
  • Member’s voting rights

Note that when a new member is added, the other members’ ownership percentage and distributive share information will also need to be updated.

4. Vote on the Change

Current LLC members must vote to approve amending the LLC operating agreement to reflect the addition of a member. Even a single-member LLC must do this. Typically, LLC operating agreements—and most states—require unanimous consent from members when adding new owners.

LLC members should record the voting outcome, have the amendment signed by all members who approved the change, and keep that documentation with their LLC formation documents and other company records.

5. Report the Change to the State

When adding owners, an LLC must notify the state. The rules vary for how to do that. Some states require that LLCs restate their original formation document (Articles of Organization). Others require LLCs to file Articles of Amendment. Others allow LLCs to update their membership information on their Annual reports. It’s critical to check the state’s legal requirements when adding new members.

6. Prepare for Tax Reporting Changes

Adding a new member to a single-member LLC results in the LLC becoming a multi-member LLC. Therefore, it goes from being taxed as a sole proprietorship to a partnership. The change to partnership taxation happens automatically and doesn’t require filing Form 8832 to elect a partnership classification. If the single-member LLC has an EIN, it may continue the same one as a multi-member LLC. If it didn’t previously have an EIN, it will need to obtain one.

When adding a new member to an existing multi-member LLC, the LLC will continue to be taxed as a partnership. At tax filing time, the LLC must ensure it issues a copy of its Schedule K-1 to each of its members, including the new member. Generally, adding a new member to an LLC does not create a taxable event for any of the members.

If the LLC members decide on taxation as a corporation or S Corporation, they must file the appropriate form (e.g., 8832 or 2553). Regardless of the LLC’s tax election, its members must comply with the specific reporting requirements of the IRS and other tax authorities.

Something to note: S Corporations may not have more than 100 owners. So, if an LLC has elected S Corp election, that tax status will be revoked automatically if adding a new member puts it over the 100-member limit.

Final Thoughts

The specifics of what your business clients must do to add a new LLC member will vary depending on their LLC operating agreement (or lack thereof!), their tax situation, the state’s laws, and other factors. It’s critical they understand what’s required before making the change. Encourage them to get professional legal advice and tax guidance so that they can move forward with confidence and peace of mind.

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