Adding a member to an LLC involves several steps and it is important that any limited liability company business do it properly. Mistakes can be disastrous. The process can vary and be very simple or extremely complex depend on each circumstances. However, here is the general 4 step process:
Step #1: Determine Whether the New Person is Eligible to be Added as an Owner
The good news is that the laws for this kind of legal entity are very lenient when it comes to member admission matters. There are no limitations or conditions when it comes to the residency, citizenship, location, affiliation or any other characteristic for a member. In addition, members don't have to be individuals. They can be corporations, partnerships, trusts and even other limited liability companies.
However, the laws also allow for an LLC business to impose its own set of restrictions, exclusions and processes for member admission. Because of this it is every important that you first consult the operating agreement of the business and review, in detail, the membership related provisions for conditions, limitations and other requirements. Step one is ensuring the specific person qualifies to be admitted in the first place.
If the LLC is being taxed under the S corporation structure, it is also essential that the member admission not cause your S election to be disqualified. Many of the S election requirements are directly related to the number and type of members in a company.
Step #2: Get Member Approvals and Meet All Process Formalities
In most cases, the operating document will require that a certain percentage vote be obtained by the existing members. This is usually done at an owner meeting or by using a standard governance form document called a Written Consent.
You should strictly obtain all voting approvals and meet any other conditions required and, even more importantly, you should document such approvals and actions in written consent documents. File these documents with the other official paperwork of the LLC.
Step #3: Have a Written Membership Issuance Agreement Documenting the Member Admission
This document does not have to be long and complicated if you have a straightforward transaction where a member is admitted in exchange for providing a cash contribution to the LLC. This document is typically called a Membership Issuance Agreement or a Member Subscription Agreement. For most small businesses, it is a simple one page document.
However, if there are other involved deal terms, then your issuance agreement must properly address them legally. One common example is if the ownership of the new member is subject to vesting or to promises in the future. I strongly recommend you use a lawyer to represent you or the LLC in these cases as the potential consequences of improperly addressing additional matters can be significant. I have seen businesses go under as a result of member disputes that could have been easily avoided.
Step #4: Ensure the new LLC Member Agree to the Operating Agreement
The operating agreement is so vital. It not only addresses how the business will be operated but it also defines the rights and obligations of each owner.
When you admit a new member to an LLC, that person needs to sign a written document agreeing to be bound by the operating agreement and all of its provisions. Hopefully your operating document imposes this as a condition to completing a member admission transaction (every one should have this). Regardless, this should be a required step every time.
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