Adding Partners to an LLC
Adding Partners to an LLC
There are many reasons why you may want to add a partner to an LLC. For example, your LLC may be expanding its business and require someone with expertise in a particular area. Or one of your current members might need to terminate his or her involvement in the business, and you need to add a new LLC member as a replacement. Regardless of the reason, many LLCs find themselves in the position of having to add a new member or a number of new members to their LLCs.
If you find yourself in a similar situation, adding partners to an LLC does not have to be an overly complex endeavour; this is particularly so if your LLC is a single-member LLC. Adding new members to a multi-member LLC will require unanimous consent of all members, which might, depending on the circumstances, be more of a challenge.
You should also keep in mind that, as with most LLC matters, individual states vary in their requirements, and you should always check your state's rules to ensure you are in compliance with state LLC regulations.
Add Partner in an LLC: Single-Member LLC vs. Multi-Member LLC
While you will need to adhere to the particular rules applicable in your specific state, when adding new LLC partners or LLC members (in an LLC, partners are called members) the other factor that affects the requirements is whether your LLC is a single-member LLC or a multi-member LLC.
With a single-member LLC, you won't have to worry about getting all members' consent to the addition to the new member, but you will need to adhere to state requirements and the terms and conditions of your LLC operating agreement, if you have one. You will also need to consider the tax consequences of adding new members to an LLC.
An LLC, or a limited liability company, is a "flow-through" entity; while it affords its members limited liability, tax consequences flow through to individual members. If you've been running a single-member LLC, adding LLC members will have the effect of turning your LLC into a partnership for tax purposes.
If your single-member LLC has been using your personal EIN as its taxpayer identification number, adding a new member means you'll have a partners LLC and your LLC will need to apply for its own EIN. You will also have to file Form 8832 with the IRS, as this will advise the IRS that your LLC should now be taxed as a partnership.
With a multi-member LLC, unless your LLC has elected to be taxed as a corporation, it will already be classified with the IRS as a partnership, and should already have its own EIN. You should, however, notify the IRS that there has been a change in members of your LLC, and provide it with the names of the new members.
When adding a member to a multi-member LLC, your main consideration, however, will be obtaining unanimity among your members as to the terms and conditions under which the new member will join the LLC, as most states, as well as most LLC operating agreements, require that all members provide their consent to the addition of new members.
Terms and conditions that have to be agreed upon include the buy-in amount, if any, which will be paid by the new member, and the percentage distribution of profits and losses.
If your LLC has an operating agreement, it may also set out rules that must be followed in order to add new members. If there is no LLC operating agreement, or your current operating agreement does not provide any guidance with respect to new members, the rules established by your state will apply by default.
Whether your LLC is a single-member LLC or a multi-member LLC, adding a new member will require you to amend your operating agreement, if you have one. At the very least, you will need to add the new member's financial contribution, if any, as well as the new member's share of interest in the company.
In most states, you will also need to add the name of your new member to the articles of organization you have filed with the state. Once you've amended your articles of organization, you should file the amendment with your Secretary of State.
If you’re ready to add a partner to your LLC, LegalZoom can help. Answer a few questions about your LLC online and we can help you make a new operating agreement, and with our legal help plans you can speak to an independent attorney for an affordable monthly price.