Can a Single-Member LLC Add Members?

If you’re wondering if you can bring additional members into your single-member LLC, the answer if yes. There are steps you can take to add members, at which point your business would become a multi-member LLC.

There’s more to that question than you might think, however, so I’d like to take some time to walk you through the ins and outs of increasing membership in your Limited Liability Company. Let’s start by reviewing what occurred when you formed your business, and then we’ll look at some pros and cons of adding one or more members.

Single-Member LLC Refresher

A single-member LLC is a one-person business that’s registered with the state or states in which it conducts business. It’s similar to a Sole Proprietorship, except you have the huge advantage of personal liability protection in the event that the business is sued or can’t pay its bills.

Unless it files Form 8832 and elects to be taxed as a Corporation, which is beyond the scope of this article, a single-member LLC reports income and expenses using Form 1040, Schedule C, and pays taxes based on the owner’s personal income rate. Because you’re considered to be self-employed, you’re responsible for paying both the employer’s and employee’s share of Social Security and Medicare taxes, which is 15.3%.

Before you registered your single-member LLC with the state, you needed to select a name for the business, make sure it was available, and select a registered agent. Hopefully, you drafted a strong operating agreement, which, although not required by law in most states, is an essential document for an LLC of any size.

You also should have opened a business bank account, for which you may have had to obtain an Employer Identification Number (EIN). Having separate business and personal accounts is important for several reasons, including preserving your liability protection and improving the image of your business.

Some Things to Think About

There are a number of reasons you might be considering adding other members to your LLC. The business may have grown to the point where you can no longer handle everything on your own and you need others to help. Or you might want to bring on someone who has expertise in a particular area of business and can serve as an advisor.

Maybe you’ve met someone who has cash to invest in your business with the stipulation that they become a member, or someone with relationships that could benefit your LLC. Those are good reasons to increase the size of your LLC, but you should consider some potential downsides for doing so, as well.

The owner of a single-member LLC is responsible for all aspects of the business, including profits and losses. If the LLC makes a lot of money, the owner is entitled to 100% of the profits. Adding new members to your LLC will spread out its ownership, meaning that profits will have to be shared among members.

Also, you may have gotten used to making all important decisions regarding your business on your own and could find it difficult to have a partner or partners who want to weigh in on how the business should be run.

Regardless of why you want to bring in new members to a single-member LLC, please be careful about who you bring on as partners, adding only members you’re sure can benefit your business. While increasing your membership isn’t particularly difficult, getting rid of partners who don’t work out can be messy and complicated.

Steps To Take When Adding Members

In a perfect world, your single-member LLC would have an operating agreement that spells out exactly how new members will be brought into the business. If you don’t have one, you should draft one now. Without an operating agreement, you’ll have to default to your state’s laws governing LLCs. Those may or may not be what you’d prefer, so having an operating agreement is usually preferable. Just be aware that even with an operating agreement you’ll need to pay attention to any state laws that apply.

The steps you’ll need to take when bringing one or more new members into your LLC are outlined below:

1. Some states require a single-member LLC to dissolve and reform in order to add members. If you’re not sure what’s required in your state, consult the laws pertaining to LLCs.
2. If you don’t have an EIN, you’ll have to get one. The IRS has a free tool you can use to fill out and submit the application, and if it’s approved, your EIN will be issued immediately. You can find the EIN application tool on the IRS website.
3. Review key elements of the new operating agreement:
   • Determine how ownership of the LLC will be divided between yourself and the new member or members.
   • Know how much new members will contribute to the business.
   • Review what percentage of profits members will receive.
   • Consider the voting rights of each member and anything else that will affect the operations of the business.
4. If you have an operating agreement, amend it to include all of the information mentioned in step three.
5. As the lone member of the LLC, you’ll need to vote to approve the changes to the operating agreement and in favor of your new members. Make sure to record your vote and file it as part of your company records.
6. You and all new members should sign the updated operating agreement to demonstrate that everyone is on board with its contents.
7. Once you’ve included other members in your single-member LLC, your tax classification will change from that of a Sole Proprietorship to a Partnership and you’ll have to file Form 8832 with the IRS to let it know if you want to be taxed as a Partnership or a Corporation.
8. You should update your accounts to reflect the presence of other members of the LLC.
9. You’ll next want to check to see if your state requires that you file amendments to the Articles of Organization you submitted when forming the LLC.
10. Be aware of all deadlines for filing paperwork with the state, paying taxes, and other obligations related to your LLC as remaining in compliance is imperative to the success of your business.
11. If you’ve already submitted a BOI report, you’ll need to update it to reflect the ownership changes.

Consider All Pros and Cons

Before starting the process to bring on additional members, I really advise that you take time to carefully consider the potential benefits and possible downsides of doing so. Consider your business timeline and your aspirations for how big you want the business to be. Are you willing for someone to have a say in all the decisions that affect the company after running it and making those decisions on your own?

If you’re convinced that bringing on new members is the right thing for your LLC, pay careful attention to what your state requires you to do. If the steps described above sound complicated and you’re not comfortable with the process, I’d advise you to consult a professional for help.