Observing your company develop and grow can be incredibly satisfying. Still, it might also indicate changes that can have an impact on its formal structure. If you have a limited liability company (LLC) you should know about the most fundamental reasons that can lead to amending your LLC Operating Agreement.
It is highly recommended for companies to make it a habit to review their Operating Agreements after any significant event has occurred. After you have the existing members’ consent, you can make amendments to the agreement to reflect the necessary changes.
One such amendment to the operating agreement is admitting new members, which we will be discussing in this guide.
What is an LLC Operating Agreement?
A Limited Liability Company Operating Agreement is a type of legal document that determines an LLC’s proprietorship and membership duties.
In this agreement, you will observe an outline of all the monetary and working relations amongst the company owners (commonly referred to as members) and between the company managers and associates.
You are legitimately required to prepare an LLC Operating Agreement if you have set up a business in any of the following states:
- New York.
Regardless of these states, all the business owners and members of a Limited Liability Company are strongly recommended to have an Operating Agreement for some of the most important reasons. They are as follows:
- Suppose it is a single-member Limited Liability Company, meaning you are the sole proprietor. In that case, an Operating Agreement will establish a sense of credibility for your LLC and help strengthen its limited liability standing in the court of law.
- Suppose it is an LLC with multiple members, meaning you have business partners. In that case, an Operating Agreement can prevent any sort of misunderstandings or conflicts as it clearly states and clarifies each partner’s roles and responsibilities.
Why is there a need to amend your LLC Operating Agreement?
The general principle is that changing any sort of information in the original documents will automatically create the need to file an amendment to those documentations.
For instance, as a company owner, you might want to pass down the business to your kids and sanction and issue a non-voting stock in advance.
In other circumstances, you might wish to switch from a member-administered LLC to a manager-managed LLC or vice versa. In both cases, you will need to file an amendment. Nonetheless, here are the most common reasons for filing an amendment in the LLC Operating Agreement.
- Add a new member or updating the LLC operating agreement after a member leaves.
- A change in the LLC’s name or purposes.
- A change in the board of managers.
- Making any sort of financial/managerial modifications outlined in the initial LLC operating agreement.
- Bringing in more capital in the business.
Adding new members on board
Before adding members to your company, you need to ensure your Operating Agreement permits it. If your LLC does not have an operating agreement yet, it is best to create one before adding new members.
Generally, adding new members is a decision that can significantly impact the firm’s proprietorship percentages for the existing members. Hence, adding a new member requires getting a majority vote from the current members.
Your LLC Operating Agreement should typically outline if you can add new members or not. If yes, then it should clearly specify what percentage of the vote is required.
Based on how you create your Operating Agreement, you will either need a majority or a significant majority of members’ votes to add one or more new members.
The agreement should also tell the percentage of interest that the new members will be receiving in the company.
Whether all the members have an equal share in the company’s interests or new members will be granted a smaller share, an Operating Agreement helps avoid conflicts and fights when the time for distribution comes.
A manager-managed LLC is where managers have absolute discretion or have the majority of votes and greater interest in the firm than others. A member-managed LLC is where all the company members have an equivalent interest in the firm.
Still, member-managed LLCs might have a few members with greater interest due to the investment capital they offered for the business setup.
Suppose your LLC Operating Agreement doesn’t permit you to add new members. However, if the majority or significant majority of votes to make amendments to the document, regarding adding new members is successful, you will need to:
- Vote on the amendment.
- Make amendments to the LLC operating agreement.
- Vote on each new member you wish to include.
How to amend your LLC Operating Agreement?
Amending your company’s Operating Agreement is straightforward. The members are only required to support the changes and document them. You can also make your members sign a non-disclosure agreement to keep the information confidential and protect it.
There are specific instructions you will need to follow to make the changes. For instance, you might require all members’ aid to approve the change or merely a majority. Whatever rules are incorporated within the original Operating Agreement must be followed, or else your amendment will be invalid.
While creating your amendment, you require a written document that declares you are making modifications and establishing the amendment in clear terms.
Each approving member should sign the amendment. After this, you will need to keep it in a safe spot with the other official documents.