I have a small LLC in Michigan (single-member, taxed as sole prop). A friend wants to invest cash for a stake but stay completely silent. How do I add him properly? Do I need a new operating agreement and file something with the state?
LLC
I want to add a silent partner to my Michigan LLC
You’ll need to amend your operating agreement and likely file a certificate of amendment to add him as a member. LARA has the forms.
filing depends on whether your LLC is member-managed or manager-managed. If you never filed an annual statement update, that might also need to be addressed.
Be careful with ‘silent partner.’ Michigan doesn’t have a specific silent partner designation. If he’s a member, he has statutory rights unless the operating agreement significantly limits them. That can still bite you. Is he just an investor or a true member?
He wants to be a member but not involved in day-to-day. I’d run the business. He just puts in cash and gets a share of profits.
Then you need a solid operating agreement with voting restrictions, transfer restrictions, and a buy-sell. Do not skip the buy-sell.
Also think about tax treatment. Adding a non-spouse member to a single-member LLC changes it to a partnership by default, unless you elect otherwise. That means a partnership return and K-1s. Some people elect S-corp but that’s a separate headache.
Single-member to multi-member also triggers a change in how you file with the IRS. You’ll need an EIN if you don’t already have one., And the name/address on the annual statement needs to be updated.
One more thing: if you’re taxed as a partnership, you need to track capital accounts. Silent partners who put in cash get a basis. If they later take distributions, you need to follow the agreement. And if you’re operating wiht a handshake, you’re asking for trouble. Use a lawyer.
We did this in 2019. Added an investor as a 40% member. Cost the attorney a few grand, plus filing fee. The operating agreement was the whole ballgame. My advice: don’t use a template.
What sandy_trail said. And pay attention to Michigan’s LLC act on member inspection rights. Even a “silent” member can demand records. If you don’t want that, you might need to structure it as a loan or a non-member profit share, but then it’s not truly equity.
Good info. He has no interest in records or decisions, but he is putting in a significant amount. I’ll look at a buy-sell and partnership tax filings. Is a lawyer mandatory for the operating agreement?
Not legally required, but highly advisable. At minimum, have an attorney review what you draft. The cost of fixing a bad agreement later is much higher.
I’ll disagree on the lawyer part. If it’s truly just a cash investment and you define distributions simply, some people do fine with a well-written agreement and no attorney. But if he has any negotiating power, you want counsel.
Don’t forget the certificate of amendment. If you change from single-membr to multi-member, that’s an amendment in Michigan. You can file online, but check the articles. If they only list you, you need to add him. And update the annual statement.
Also check if your LLC has any business licenses or permits tied to ownership. Adding a member ccan trigger a notice or new background check depending on the industry. Often overlooked.