In Illinois, can the sole member of a limited liability company (LLC) change the LLC’s ownership or add an additional member at any time without notifying their bank? We are concerned about our potential liability if a sole member of an LLC adds a member without notifying us and doesn’t wish to allow them to make transfers between a personal account and the business account using internet banking.

Under the Illinois Limited Liability Company Act, a single-member LLC may agree to admit new members at any time. We are not aware of any laws or regulations that would require an LLC to notify their bank whenever they add a new member. However, you may require your customers to provide such notification if they have agreed to do so in their account agreement.

If a single-member LLC adds a new member, it is possible that it may need a new taxpayer identification number (TIN) if you did not require the LLC to obtain a separate employer identification number (EIN) before opening the account. This is because the IRS allows single-member LLC to use the single owner’s social security number rather than obtaining a separate EIN for the LLC. However, if the single-member LLC later added a new member, the LLC would be required to obtain a separate EIN.

The IRS also has explained that even a single-member LLC can obtain a separate EIN if required to open a bank account. If you are concerned that a single-member LLC may convert to a multi-member LLC with a different EIN at a later time without notifying you, it may be advisable to request that the single-member LLC obtain a separate EIN before opening an account at your bank.

Additionally, if your bank becomes aware that a single-member LLC has added a new member (i.e., a new owner), your bank may be required to collect additional information from the LLC under FinCEN’s Customer Due Diligence requirements. FinCEN’s regulations allow banks to rely on the information supplied by legal entity customers regarding the identity of their beneficial owners and do not require continuous or periodic updates of beneficial ownership information, but we believe you should ask your customer to update its beneficial ownership information when your bank has knowledge of facts that would reasonably call into question the reliability of the beneficial ownership information that you have on file for the customer.

As to online banking, we recommend restricting access and requiring verification (for example, through an authorized signer agreement) that a new member has authority to act on behalf of the LLC before allowing a new LLC member to conduct transactions on behalf of the LLC. This step is particularly important because the Illinois Limited Liability Company Act was revised in 2016 to provide that an LLC’s members do not automatically have authority to act on behalf of an LLC. Limiting who can conduct online transactions could help to encourage your LLC customers to notify you when they add new members, and authorized signer agreements or similar agreements, if drafted correctly, could protect your bank in the event of a dispute over a member’s authority to act on behalf of the LLC.

For resources related to our guidance, please see:

Limited Liability Company Act, 805 ILCS 180/10-1(a) (“A person becomes a member of a limited liability company: . . . (2) after the formation of the company,

(A) as provided in the operating agreement;

(B) as the result of a transaction effective under Article 37 [Conversions, Mergers, and Series];

(C) with the consent of all the members; . . .”)

IRS, Single Member Limited Liability Companies (“A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a ‘disregarded entity’). A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.”)

IRS, Single Member Limited Liability Companies (“A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a single-member LLC, whose taxable income and loss will be reported by the single member owner needs an EIN to open a bank account or if state tax law requires the single-member LLC to have a federal EIN, then the LLC can apply for and obtain an EIN.”)

FinCEN Regulations, 31 CFR 1010.230(a) (“Covered financial institutions are required to establish and maintain written procedures that are reasonably designed to identify and verify beneficial owners of legal entity customers and to include such procedures in their anti-money laundering compliance program required under 31 U.S.C. 5318(h) and its implementing regulations.”)

FinCEN Regulations, 31 CFR 1020.210(a) (“A bank regulated by a Federal functional regulator shall be deemed to satisfy the requirements of 31 U.S.C. 5318(h)(1) if it implements and maintains an anti-money laundering program that: . . . (2) Includes, at a minimum: . . . (v) Appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: . . . (B) Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. For purposes of this paragraph, customer information shall include information regarding the beneficial owners of legal entity customers. . . .”)

Customer Due Diligence Requirements for Financial Institutions, 81 Fed. Reg. 29397, 29399 (May 11, 2016) (“When a financial institution detects information (including a change in beneficial ownership information) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer, it must update the customer information, including beneficial ownership information. Such information could include, e.g., a significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason or a significant change in the volume of activity without explanation. It could also include information indicating a possible change in the customer’s beneficial ownership, because such information could also be relevant to assessing the risk posed by the customer. This applies to all legal entity customers, including those existing on the Applicability Date. This provision does not impose a categorical requirement that financial institutions must update customer information, including beneficial ownership information, on a continuous or periodic basis. Rather, the updating requirement is event-driven, and occurs as a result of normal monitoring.”)

FinCEN Regulations, 31 CFR 1010.230(b)(2) (“. . . A covered financial institution may rely on the information supplied by the legal entity customer regarding the identity of its beneficial owner or owners, provided that it has no knowledge of facts that would reasonably call into question the reliability of such information.”)

Limited Liability Company Act, 805 ILCS 180/13-5(a) (“A member is not an agent of a limited liability company solely by reason of being a member.”)