Admission of additional members: Overview, definition, and example
What is admission of additional members?
Admission of additional members refers to the process by which new individuals or entities join an existing business entity, such as an LLC or partnership. The terms for admitting new members are typically outlined in the business’s operating agreement or partnership agreement. This process ensures that all current members agree on how new participants can be added and what rights or responsibilities they will have.
For example, if a small business structured as an LLC wants to bring in a new investor as a member, the existing members must follow the agreed-upon procedures, such as obtaining majority approval or revising ownership percentages.
Why is admission of additional members important?
This provision is important because it prevents disputes and maintains control over who can join a business. Without clear rules, disagreements could arise over ownership stakes, decision-making power, or financial contributions.
For small businesses and partnerships, setting conditions for new members helps protect the interests of existing members while allowing for growth and investment opportunities. It also ensures that new members understand their rights and obligations before joining.
Understanding admission of additional members through an example
Imagine three co-founders start an LLC to run a marketing agency. Their operating agreement states that adding a new member requires unanimous approval. A potential investor offers to join the LLC in exchange for a 20% stake. Before the investor can be admitted, all three co-founders must agree, and the operating agreement may need to be updated to reflect the change in ownership.
In another example, a two-person partnership runs a retail store. Their partnership agreement states that additional members can only be admitted if both partners agree in writing. If one partner wants to bring in a new member, but the other disagrees, the new member cannot join unless the agreement is revised.
An example of an admission of additional members clause
Here’s how a clause like this might appear in an operating or partnership agreement:
“No new Member shall be admitted to the Company without the unanimous written consent of the existing Members. Any new Member shall be required to agree to and execute the terms of this Agreement before admission.”
Conclusion
The admission of additional members clause ensures that existing business owners have control over who joins their company. It helps maintain stability, prevent disputes, and clarify the process for expanding ownership. Businesses should carefully outline these terms in their agreements to protect their interests while allowing for future growth.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.