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Members of an LLC may change the LLC’s ownership and the terms governing its management and operation by amending its operating agreement. Once LLC members amend the operating agreement and the new ownership and management terms are reflected in it, there are some necessary follow-up actions.
Below is your five-item checklist, listing government agencies and other parties that LLC members must notify after changing the LLC operating agreement.
When the EIN is issued in the name of the LLC, the IRS will require the information of a Responsible Party of the LLC. The IRS defines the Responsible Party as “the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets.”
If the member leaving the LLC is listed as the Responsible Party, the IRS must be informed by the LLC’s filing or the Form 8822-B and a new Responsible Party must be named. The IRS mandates the Form 8822-B is filed within 60 days of the membership change.
A change in ownership whereby the LLC changes from a multi-member LLC to a single-member LLC may change how the LLC is taxed by the IRS. Typically, for tax purposes, the IRS treats a single-member LLC as a disregarded entity, meaning that it need not file its own return and is not considered a taxable entity, and a multi-member LLC as a partnership, meaning that, while the LLC does not pay tax, it acts as a pass-through and the individual members are taxed. The distinction sounds unimportant upon first glance but has repercussions that the members must consider. To make the change to a single member LLC, the Form 8832 is completed and submitted to the IRS.
Members and managers of the LLC must remember to inform the LLC’s bank(s) about any amended membership in the LLC or changes in the key management or control provisions of the LLC. If the change in membership and/or control is extensive enough to constitute a change in control or a sale of the LLC, the bank may have the right under loan or other documents to require its prior approval to such a change or the right to amend or terminate the relevant agreement.
As a result, an LLC should check its agreements with banks or other lenders prior to a major change in membership or control of the LLC to determine what type of transaction would trigger such rights, if such rights are present or are triggered.
3) States in which the LLC is foreign qualified:
Many states, including Florida, Texas, Massachusetts and Illinois, require that a Delaware LLC (or any LLC not formed in the applicable state) complete a list of the member names and addresses to approve the application to qualify the LLC in the state as a Foreign LLC. This information must be updated as needed with the states in which the LLC is qualified as a Foreign entity.
Annual reports in many states allow you to update the member information once a year during a designated filing period. If the need is more urgent, often an amendment to the qualification can be filed to ensure that relevant states have a current list of the LLC’s members.
4) The LLC’s Registered Agent:
The LLC’s Registered Agent in the State of Delaware needs any new individual member’s name, street address, and phone number, and this information must be kept current for the Communications Contact. This information is not provided to the State of Delaware and is not publicly available.
If the member leaving the LLC is the Communications Contact, the LLC must update the Communications Contact information right away with the Registered Agent to ensure any service of process or important notices about the LLC are received. Failure to keep the information up-to-date and valid can force the Registered Agent to take drastic action, such as resigning as the LLC’s Registered Agent in Delaware.
If the Registered Agent resigns, the LLC does not have a Registered Agent until a new party is appointed, placing the LLC in an inactive status. A company in inactive status cannot obtain a Certificate of Good Standing, which severely limits the LLC’s activities and transactions, and may affect the limited liability provided to the members by the LLC form.
5) Third parties engaged in contracts or agreements with the LLC:
As with the case of an LLC’s agreements with banks, a proposed significant change in control could trigger provisions of agreements with lenders, suppliers, distributors and other counterparties giving such party a right of prior approval or prior notice with respect to such a transaction. A failure to abide by such provisions could give the counterparty the right to terminate the relevant agreement upon terms unfavorable to the LLC or could require cumbersome, remedial steps be taken by the LLC and its members and/or managers. As a result, any proposed substantial change in membership and/or control should be preceded by a review of all relevant or key agreements entered into by the LLC.
If you have any questions about the steps, notifications or filings that are necessary before or upon changing the membership or management of an LLC, call one of our helpful specialists at (800) 345-2677, extension 6900, and we would be happy to assist you.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE'S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.