Members

What Is an LLC Member?

A Limited Liability Company (LLC) member is an individual or entity that holds an ownership interest in an LLC. Unlike corporations, which have shareholders, LLCs use the term "members" to describe their owners. Members can be individuals, corporations, other LLCs, or even foreign entities. The flexibility of LLC ownership makes it an attractive business structure for small business owners, entrepreneurs, and investors.

LLC members play a vital role in decision-making, financial contributions, and day-to-day operations, depending on the structure of the company. Understanding the implications of membership is crucial for those considering forming or joining an LLC.

Who Can Be an LLC Member?

Most states allow any individual or entity to be a member of an LLC. This means:

• U.S. citizens and residents can be members.

• Non-U.S. residents and foreign entities may also become members.

• Other businesses, including corporations and partnerships, can hold membership in an LLC.

• Single-member LLCs are permitted, meaning only one person or entity can own the business.

However, some restrictions may apply. For example, certain professional service businesses may be required to form a specific type of LLC (such as a PLLC, or Professional LLC) or another entity type altogether. Additionally, some states may have rules regarding the membership of foreign or corporate entities in an LLC.

Furthermore, some industries may impose restrictions on LLC ownership due to regulatory concerns. For example, businesses in finance, legal, or healthcare industries may be subject to additional licensing requirements that impact who can be a member.

What Are the Rights and Responsibilities of LLC Members?

LLC members have both rights and obligations based on the company’s operating agreement and state laws. These typically include:

1. Ownership Rights Members own a percentage of the LLC, known as a membership interest, which can determine voting power, profit distribution, and responsibilities.

2. Management Roles

   • Member-Managed LLCs: Members actively run the company, handling daily operations and business decisions.

   • Manager-Managed LLCs: Members appoint one or more managers (who may or may not be members) to run the business, limiting members' direct involvement.

3. Financial Responsibilities

   • Members typically contribute capital (money, property, or services) to fund the LLC.

   • Members may receive profits and losses according to their ownership percentage unless the operating agreement states otherwise.

4. Fiduciary Duties

   • Members have a duty to act in the best interest of the LLC and its members.

   • This may include the duty of loyalty (acting in good faith for the company’s benefit) and the duty of care (avoiding reckless or negligent actions).

   • Members should avoid conflicts of interest and refrain from actions that could harm the company’s financial or legal standing.

5. Decision-Making Authority

   • Members typically participate in major business decisions, including strategic planning, hiring, and financial oversight.

   • Voting rights are often proportional to ownership percentage unless otherwise stated in the operating agreement.

   • In some LLCs, a supermajority vote (e.g., two-thirds or three-fourths of members) may be required for critical decisions like dissolution or amending the operating agreement.

Compliance and Legal Considerations for LLC Members

While LLCs are known for their flexibility, members must ensure they comply with legal and operational requirements. Dappr helps customers stay on top of these compliance tasks, including:

1. Operating Agreements

   • An LLC’s operating agreement outlines member roles, ownership percentages, voting rights, and financial responsibilities.

   • While not legally required in every state, having an operating agreement helps prevent disputes and ensures clear business governance.

   • Dappr provides guidance and tools to help businesses draft and maintain a strong operating agreement.

2. Taxation and Reporting Requirements

   • LLCs can be taxed as sole proprietorships (for single-member LLCs), partnerships, or corporations, depending on their election with the IRS.

   • Members may be responsible for self-employment taxes if the LLC does not elect corporate taxation.

   • Dappr provides ongoing compliance monitoring to ensure customers meet their tax obligations.

3. Annual Reports and State Filings

   • Most states require LLCs to file an annual report or biennial report to keep their business in good standing.

   • Failing to file these reports can result in fines, penalties, or administrative dissolution of the LLC.

   • Dappr tracks deadlines and helps businesses stay compliant with these filing requirements.

4. Liability Protection

   • LLCs provide limited liability protection, meaning members are not personally responsible for business debts or legal actions.

   • However, members must follow corporate formalities to maintain this protection, such as keeping personal and business finances separate and properly documenting business decisions.

Adding or Removing LLC Members

The process of adding or removing members depends on the terms set in the LLC’s operating agreement and state laws.

1. Adding a Member

   • The new member must agree to the terms of the LLC’s operating agreement.

   • Existing members typically need to vote on and approve the new addition.

   • Ownership percentages and profit-sharing may need to be revised.

2. Removing a Member

   • Members may voluntarily leave or be removed under conditions outlined in the operating agreement.

   • Some states require unanimous consent from all remaining members for removal.

   • If an operating agreement is silent on removal procedures, state default laws may apply, potentially leading to complex legal proceedings.

3. Transferring Membership Interest

   • Many operating agreements include restrictions on transfers, requiring members to offer their interest to existing members before selling to an outside party.

   • Without clear terms, disputes can arise over valuation and ownership rights.

What Happens When an LLC Member Dies or Becomes Incapacitated?

If an LLC member passes away or becomes unable to participate in business operations, the operating agreement determines how their ownership interest is handled. Common provisions include:

• Allowing heirs to inherit the membership interest.

• Requiring the LLC to buy out the deceased member’s interest.

• Granting other members the right of first refusal before selling to an external party.

Without a well-defined operating agreement, state laws may dictate the outcome, which can lead to complications and unintended consequences.

Final thoughts

LLC members play a crucial role in the operation and success of the business. Understanding their rights, responsibilities, and compliance requirements helps ensure smooth operations and legal protection.

Dappr provides tools and resources to help LLC members stay compliant with operating agreements, tax obligations, and state filing requirements, allowing founders to focus on growing their businesses with confidence. Whether forming an LLC, managing membership changes, or ensuring compliance, Dappr simplifies the process every step of the way.