How to Add a New Member to a Single Member LLC

[adjusterjack]

My question involves business law in the state of: New York

My sister in NY owns a single member LLC in which she, of course, is the single member and has no employees.

She would like to add me as a member in an advisory capacity. I don't require any ownership interest, voting rights, management responsibility or share of profits. I would not be making a capital contribution, just providing a service.

I have checked the NY LLC statutes and they don't appear to address that issue one way or the other and allows an LLC to do just about anything the Operating Agreement allows it to.

Is it possible to add a member who would not have any ownership interest, voting rights, management responsibility or share of profits?

I am already aware that a two member LLC is treated as a partnership for tax purpose so we need not go into that.

Thanks.

[flyingron]

The term "member" in an LLC is roughly equivalent to "shareholder" in a corporation. Membership reflects some ownership interest.
It makes no sense to be a member without ownership interest.

Your awareness is wrong on the taxability. A partnership is one of the ways a multimember LLC can be taxed, it's not the only way. However, it is going to be different than the sole proprietorship she is currently using.

You can provide a service to the LLC just by being a contractor or employee. Just what do you think is necessary?

[adjusterjack]

The term "member" in an LLC is roughly equivalent to "shareholder" in a corporation. Membership reflects some ownership interest.

Hmmm. Makes sense. I can work with minimal ownership.

Your awareness is wrong on the taxability. A partnership is one of the ways a multimember LLC can be taxed, it's not the only way. However, it is going to be different than the sole proprietorship she is currently using.

I understand the other methods. I mentioned partnership because it's a rather modest income producing business. And we'll be talking to her tax accountant anyway.

You can provide a service to the LLC just by being a contractor or employee.

Can't be a contractor because I have to be part of the business. Can't be an employee because NY would require worker's comp insurance and that can't be justified by the modest income.

Just what do you think is necessary?

My sister has her medical insurance through the market place. It's expensive and not all her providers are in network with the company she has now.

The company she wants isn't available through the market place but will write one principal of a two member LLC but won't write the principal of a one member LLC. Hence me becoming a member of her LLC. The health insurance agent in NY has already cleared the brother/sister LLC and will be given a document verifying my involvement as a member. Admittedly, it's a bit of a finagle, but if the insurance company is OK with it, we'll work it out.

This is my baby sister (11 years younger) and I take care of her, no matter what.

Thanks for the comments.

[flyingron]

She should give/sell you some trivial share of the company. That will make you a member. You'll need to draft (have drafted) an operating agreement that sets out the percentages. While treating it as a partnership or S corp is a little more involved than the sole proprietorship, it's not THAT onerous (especially for the benefit she is looking for). You can draft the operating agreement so she can buy your share back at her discretion if she finds it's no longer necessary.

[Taxing Matters]

Is it possible to add a member who would not have any ownership interest, voting rights, management responsibility or share of profits?

No. It is possible to be a member but have no management authority if you make it a manager-managed LLC rather than member managed LLC. Your sister could then be the sole managing member of the LLC. But being a member is being an owner of the LLC. So you’d need to have some ownership interest to be a member, but it could be very small, e.g. 1%.

[adjusterjack]

Got it. Thanks, both of you.

[llworking]

Got it. Thanks, both of you.

I still do not understand why you need to be a member in order to give your sister advice.

[jk]

I still do not understand why you need to be a member in order to give your sister advice.

I believe it is essentially a means for sister to obtain insurance she wants that isn’t otherwise available to her with a single member llc. It appears to be of no benefit to jack nor does it appear he really intends on having any real involvement in the llc.

[Taxing Matters]

I still do not understand why you need to be a member in order to give your sister advice.

He doesn’t. But in order to get group insurance for the company it needs to have more than one person as owner or employee. By having two members it qualifies to get that insurance which provides the sister better benefits at less cost than an individual policy. This is the real purpose of it. He doesn’t have to be a member to give advice, but being a member provides a benefit that being simply an outside advisor does not.

[adjusterjack]

Last two posts are correct.