Fact Checked by Editorial Staff 
A Limited Liability Company (LLC) can be member-managed or manager-managed. When it is a member-managed LLC, that means multiple owners run and manage the company. Adding and removing members and ownership transfer often happen within the company. Whether a new member comes or an old one leaves, it can happen anytime for several reasons.
If you have this question in mind, how a member can be added or removed from an LLC, this article explains everything. From reviewing the operating agreement to updating the IRS about new members or removed members, all they have to do is follow some simple steps.
- Adding or removing members from an LLC is common and may happen anytime.
- Revieweing operating agreement and following the proper process will make it easier to add or remove LLC members.
- Voters or other members’ consent is the top priority here.
- Once the new member is accepted, immediately update the IRS and other financial institutions for smooth transactions.
How to Add a New Member to Your LLC
LLCs follow a simple structure compared to a corporation. Usually, an LLC can be member-managed or manager-managed. In either case, making structural changes, such as removing or adding members, can be complicated. However, there are a few things that one must keep in mind while getting another member on board. Members are the owners of your LLC. Getting a new member requires some sort of homework from both the company and the member.
Step 1: Review Operating Agreement
This is a very crucial step. Now, many states do not have a mandatory rule to get an operating agreement. However, it is always wise to have one, especially for the member-managed LLC. First, you must review the operating agreement. Usually, based on their capital contributions, members receive their share of the profit.
- Acceptance: The very first thing is to accept the new member by the old members of the LLC.
- Ownership and Voting Rights: The next thing to review is the ownership and voting rights the new member shall hold. It usually depends on the capital contribution.
Step 2: Capital Contribution
The next step is to decide on the capital contribution of the new member. They can purchase shares (ownership) with any form of capital, such as cash, property, or they can be working partners by providing service. Based on the capital contribution, they will have their ownership share or rights.
Besides, before they join the company, they must be clear about the role they will hold as a member of the LLC. Based on that, they will have their voting rights in the future.
Step 3: Consent from Members
The next step is to get the official consent from the existing members. This is usually done by voting and accepting written consent from the existing members.
- Voting: The rest of the members must vote in support or against the new person. The majority should go in favour of the new member joining the company.
- Documented: Once the voting is done by all the members, document it for future reference.
Step 4: Update the Operating Agreement
The next step is to amend the operating agreement with the details of the new member. Verify the new member and get the signing consent from all other existing members.
Once you update the operating agreement with new clauses, ownership conditions, capital contributions, role and interest of the new member. If there is a transfer of ownership, that should also be updated on the operating agreement.
Step 5: Notify IRS, SOS, and Other Financial Institutions
As soon as the amendment is done, it is time to notify all the leading institutions, such as IRS, SOS (if required), and other financial institutions, for a smooth transaction and tax filing.
Based on the LLC’s structure, for example, if it is filed as a partnership, you might have to file Form 8832 for the modified information.
Once this is done, the process of adding a new member to the LLC is completed.
How to Remove an Existing Member From an LLC
Removal of an existing LLC member can be of two types: voluntary and involuntary. In the case of voluntary removal, the process is easier than the other type. Though both processes are similar, in involuntary removal, some complexities may arise if the operating agreement is not properly drafted.
Voluntary Removal
Voluntary removal happens when a member voluntarily moves out of the LLC. That mostly occurs when the member resigns or retires. In both cases, the following steps are required to be followed,
Step 1: Written Notice of Removal to the LLC
If the ground is known, for example, resignation of a member, the exiting member can write a resignation letter to the LLC or the other members stating the reason for their departure. This should be accepted by other members if the resignation follows the operating agreement.
You must review the operating agreement and the rules of leaving the LLC voluntarily. There must be a rule or guideline for it. You make sure the exiting member follows them all.
Step 2: Buyout the Exiting Member
The next step is to buy out the exiting member. This means the valuation of their service or contribution according to the provisions of the operating agreement. Every operating agreement of an LLC should have an exit plan for each member. That means the conditions and ownership transfers related to the departure of any member of the LLC at any point in time.
According to those conditions and provisions, the buyout or valuation takes place. Based on that, the exiting member may or may not negotiate with the full and final payment of the member.
Step 3: Consent of Other Members
We already mentioned how consent works for adding a new member. Similarly, when an old member leaves the company, other members vote in support of or against the decision. From casting votes to document the decision or keep the record, the process is the same for removing an old member.
However, it may not be the same for all LLCs. If operating agreement provisions are clear and follow the exit plan accordingly, it may not be necessary to get other members’ votes or written consent for the removal of the member.
Step 4: Amend the Operating Agreement
Finally, amend the operating agreement with the new information and the removal of a member. Some states require you to amend the Articles of Organisation (Formation) to change members. But some states, like Louisiana, do not require filing an amendment of formation documents for removing an old member from the LLC.
Based on the state you are in, it varies whether to amend the formation document or not. But in every state, amending an operating agreement is a must when a change of membership takes place in the LLC.
Step 5: Notify IRS, SOS, and Other Financial Institutions
Once all the changes are officially made and the process of the removal of a member is completed, you must notify the IRS, SOS (if required), and all other financial institutions for smooth transactions.
You may file a new tax form to change the members if your LLC is registered as a partnership or corporation. Other financial institutions, like insurance companies and banks, should also be notified about the change in the LLC.
Involuntary Removal:
Involuntary removal happens when a sudden situation occurs, for example, the death of a member or the breach of the operating agreement. In this case, the LLC may not follow the exit plan according to the provisions of the operating agreement.
Reasons for Involuntary Removal:
- The death or physical or psychological inability of a member
- Breach of operating agreement
- Criminal offence or activity, or eviction
- Breach of data and information from the company
- Failure to meet the capital contribution target
- Bankruptcy or financial incapacity
If the member has to be removed from the LLC for any of the reasons mentioned above, it will be an involuntary removal of the member. In that case, the process of the member removal will be slightly different from the voluntary removal.
Challenges in the Involuntary Removal of a Member from an LLC
- Usually, the operating agreement includes everything. From joining the company to ‘what if’ the person has to leave under certain conditions. But sometimes, due to unforeseen incidents, LLCs fail to follow the operating agreement and its exit plans.
- The second challenge in involuntary removal is to decide on the valuation or buyout. The issue arises when the company is not ready for the buyout or does not have enough cash flow for the involuntary removal.
- This leads to disputes in payment terms for the exiting member. If the removal has to be done immediately for any unforeseen reasons, the company may or may not be ready to settle the full and final payment, even when it is decided on the operating agreement.
Common Errors While Changing Members
Changing a member (adding or removing) is always hectic for an LLC, irrespective of the size of the company. There are common issues that usually happen when a change takes place. The following are the common errors or pitfalls in adding or removing an LLC member,
- Unclear operating agreement: If the provisions in the operating agreement related to changing a member are unclear, it might lead to a complicated process in the future.
- No Prep for Future Tax Implications: Changing members may lead to changes in taxation in the future. A lot of LLCs do not get prepared for those consequences.
- No proper documentation or process to follow: In many cases, LLCs do not have proper documentation and don’t follow a proper process of adding or removing new members. That makes things more complicated.
How to Make an LLC Member Change Easy
There are ways to make things much simpler when a change takes place. The main focus point should be a clear operating agreement. In many states, drafting an operating agreement is not mandatory, as it is an internal document. But every LLC must file a proper and clear operating agreement for such future events.
It is good to plan everything ahead of time. Once you form your LLC, make sure to document everything from exiting a member to adding a new one. This will help the addition and removal of members be smooth and hassle-free.
Keep records of everything from starting the company to the conditions under which it will continue working. More details lead to a faster, less complicated process.
Another tip to make things easy is to seek help from professionals. Some professionals take care of everything from forming your business to running it hassle-free.
In Conclusion
LLCs are easy to form as they are less complex than a corporation. However, making any changes, like adding or removing members, changes the entire internal system. Hence, it is very important to plan everything ahead of time and, of course, keep updating the operating agreement with new conditions according to SOS rules and other guidelines.
On the other hand, the company must be prepared for the involuntary removal. As mentioned, in case of involuntary removal, the company must be prepared to pay or buyout. This article captures almost all the details you need to follow for adding or removing members from your LLC. However, it is recommended to consult professionals like attorneys before you make a decision.