If you own a limited liability company in California and are considering adding a new member, there are multiple factors that need to be considered. Adding a new member to an existing LLC is more complicated than it may seem at first glance. It is also important to be aware of the potential benefits, drawbacks, and pitfalls that may arise from the addition. With the arrival of a new member, you are adding an unknown element to the already existing business relationship. This could be great, but it could also create chaos. For example, adding a new member to an LLC will most likely result in existing members having their percentage interest in the LLC diluted, thereby potentially resulting in less profit per member.
The Impact On Taxes and the Company Operating Agreement
Two notable issues to consider when contemplating adding a new member to your LLC are (i) the tax ramifications and (ii) necessary modifications to the LLC operating agreement.
Regarding taxes, it is important to be aware of that fact that they cannot operate as a sole proprietorship, when there are at least two different owners or partners operating an LLC. If, for example, you have a single-member LLC and decide to add a new member, you must file taxes as a partnership or a corporation.
Regarding the operating agreement, the addition of a new member to your LLC often necessitates a level of revision to this important legal document. Why? Because an LLC operating agreement usually explains the different aspects of corporate governance, obligations, responsibilities, and what to do in the event of a member or manager deadlock. As a result, the addition of a new member will require editing the operating agreement to include how much of an interest the new member will have, their role, and their obligations.
Specific Requirements for Adding a New Member
To formally add a new member to your LLC, you need to be clear about what percentage of ownership the new member will have with the company, along with their voting rights and decision-making authority. Profits and losses attributed to their responsibilities should be detailed within the terms of the agreement. The corporate formalities contained within your operating agreement, such as voting the new member in and recording the minutes of the meeting, should be followed rigorously.
Have Questions or Seeking Advice About How to Properly Add a Member to Your LLC? Contact an Experienced Business Lawyer in Los Angeles Today
When it comes to drafting, editing and modifying important operational documents for a business, it is imperative to have a knowledgeable business lawyer in Los Angeles provide guidance to ensure the documents are compliant with all relevant state and federal laws. The Hakim Law Group is ready and able to assist. For further information or to schedule an appointment with an expert business attorney in Los Angeles, please contact The Hakim Law Group at 310-993-2203 or visit www.HakimLawGroup.com to learn more.