Adding Partners to an LLC

Adding a partner to an LLC

Aside from potential tax consequences, one of the most important considerations for an LLC to add members is obtaining a unanimous vote by current members as to the terms and conditions under which the new member will join the LLC. Some terms that all members must agree to include are the buy-in amount and the percentage distribution of profits and losses.

If your LLC has an operating agreement form, adding a new member means amending the document to include details about the new member. Aside from the partner's name, you should also include their financial contribution, if any, and the new member's share of interest in the company.

Converting a single-member LLC to a multi-member LLC

If you currently own a single-member LLC and would like to add a partner, the good news is that you don't have to worry about obtaining a unanimous vote to approve the new member. That said, there are a few other considerations you'll need to address involving formalities and tax consequences.

First, regarding formalities, even if you are the only member of an LLC, to add another member, you must follow your company's operating agreement as well as any applicable state law. Note that this process may require dissolving and reforming your LLC if required under state law.

Next, regarding taxes, know that you effectively form a partnership when you add another member to a single-member LLC. The IRS considers an LLC a "disregarded" or "flow-through" entity, which means tax consequences flow through to the individual owners. If you add an owner, then the LLC needs its own employer identification number (EIN), and you must file Form 8832 to inform the IRS that the entity should now be taxed as a partnership.

Note that if your company is already a multi-member LLC, you should still notify the IRS of additional changes in members. Unless the multi-member LLC is classified as a corporation for tax purposes, it should already have its own EIN.

Adding a partner or member to an LLC doesn't have to be a complicated process—and in most cases, it isn't—but you do have to make sure you're following all of the procedures required by law. If you have any questions about adding a member to your LLC, you should seek professional advice to make sure you don't run afoul of state law.