Adding a member to an LLC involves several steps and it is important for any limited liability company business to do it correctly. Mistakes can be disastrous. The process can vary and be very simple or extremely complex depending on each circumstance. However, here is the general 4-step process:
Step #1: Determine if the new person is eligible to be added as an owner
The good news is that the laws for this type of legal entity are very lenient when it comes to membership issues. There are no limitations or conditions as to a member’s residence, citizenship, location, affiliation or any other characteristic. Furthermore, members do not have to be individuals. They can be corporations, partnerships, trusts, and even other limited liability companies.
However, the law also allows an LLC company to impose its own set of restrictions, exclusions, and processes for the admission of members. Because of this, it is very important that you first consult the company’s operating agreement and review its membership-related provisions in detail for conditions, limitations, and other requirements. The first step is to make sure that the specific person qualifies to be admitted in the first place.
If the LLC is taxable under the S corporation structure, it is also essential that membership admission does not cause your selection to be disqualified. Many of the selection requirements are directly related to the number and type of members of a company.
Step #2: Get member approval and go through all the formalities of the process
In most cases, the operating document will require existing members to obtain a certain percentage of votes. This is usually done at a homeowners meeting or through the use of a standard governance form document called Written Consent.
You must strictly obtain all voting approvals and comply with any other required conditions and, most importantly, you must document such approvals and actions in written consent documents. Submit these documents with the other official LLC paperwork.
Step #3: Have a Written Membership Issuance Agreement Documenting Member Admission
This document doesn’t have to be long and complicated if you have a simple transaction where a member is admitted in exchange for providing a cash contribution to the LLC. This document is generally referred to as a Membership Issue Agreement or Member Subscription Agreement. For most small businesses, it’s a simple one-page document.
However, if there are other terms of the deal involved, then your issue agreement must legally address them adequately. A common example is if the new member’s property is subject to vesting or future promises. I strongly recommend that you retain an attorney to represent you or the LLC in these cases, as the potential consequences of inappropriately addressing additional issues can be significant. I have seen businesses go under as a result of disputes between members that could have been easily avoided.
Step #4: Make sure the new LLC member agrees to the operating agreement
The operating agreement is so vital. It not only addresses how the business will be operated, but also defines the rights and obligations of each owner.
When you admit a new member to an LLC, that person must 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 of completing a member admission transaction (everyone should have this). Regardless, this should be a required step every time.