Thursday, January 20, 2011

Converting from a single-member LLC to a 2-person or Larger LLC

I recently had a question about what is involved in converting from a single member limited liability company (LLC) to a 2-person or larger LLC. The person wanted to know how easy or difficult it was because they wished to obtain equity in the LLC. The founder was showing reluctance to add him as a member. I've had similar questions so thought I'd include my response here.

The ease or difficulty depends. If you take the short cut, it is easy and not a big deal. But I don't recommend this. It sounds like the owner doesn't want to give you equity in the first place, so not setting up everything properly could result in a lot of headaches down the road. I've seen a lot of businesses or relationships fall apart because of disagreements between the owners...and that was when things started out very well.

The current owner of the single person LLC will have to file an amendment to make the LLC a 2-person or more LLC. This is the "easy" part. That documentation is fairly straight forward. He will need to file a Member Agreement (depends on the jurisdiction). This is the "hard/complicated" part. Even if it's not officially required, it's important that a FULL Membership Agreement be completed. This Agreement states who has what shares/membership interests, who is responsible for what, what happens in the event of a serious disability, death, or business break-up, and how to handle a sale or dissolution of the business. Working through this Agreement will bring potential issues to light and make for a smooth transition should you decide to go your different ways, or when the business is sold or dissolved.

Note: If someone keeps saying something is complicated, try to determine their underlying concerns and address them. Maybe it is that the LLC Membership Agreement seems complicated. Or maybe he just doesn't want the headache of another owner, no matter how small the equity stake. If it's the latter, you'll have to convince him that what you bring to the business is truly greater than any headache he anticipates.

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