Your business is expanding, and it’s time to bring in some new experience and expertise. Adding a new partner, also known as a member, to your LLC doesn’t need to be complicated. But, it’s also important to follow the right agreements and laws, update your documents and understand the tax consequences.
The methods for adding a new partner do vary depending on if you’re a single-member or multi-member LLC and whether you have an operating agreement. We’ve covered all of the different scenarios below.
These rules mainly apply to member-managed LLCs. Manager-managed LLCs may delegate responsibilities in a different way, so speak to your accountant or an attorney to check you’re following the right rules.
How to Add a Partner to a Single-Member LLC
Adding a partner to a single-member LLC is more straightforward than adding a partner to a multi-member LLC, as you don’t need to worry about getting votes from other LLC partners. You will still need to follow certain rules to add a new person to your existing LLC:
- If you have an operating agreement for your single-member LLC, make sure that you follow that agreement when bringing in a partner.
- If you don’t have an operating agreement, make sure that you follow the laws in your state to add a member to your LLC, as you will default to those laws. Search for those laws on the Secretary of State website or another legal resource.
- Even if you do have an operating agreement, ensure that you review state laws anyway to ensure you’ll be in compliance.
- Formally invite the partner to join your LLC.
- If you don’t already have an operating agreement, draw one up and have all partners sign it. If you do have an agreement, make any necessary changes prior to getting it signed.
How to Add a Partner to a Multi-Member LLC
The method for adding a partner to a multi-member LLC is similar to a single-member LLC with one important exception — you will need to get the agreement of the other LLC partners. Speak to each of them and check that they will approve the addition of a new member, in line with your operating agreement. Then, hold a formal vote and document the results.
Most operating agreements and default state laws will require unanimous approval from existing partners to add a new partner to the business. Once you have a unanimous agreement to bring in a new partner, you can follow the process listed in the section above.
Adding a Partner to Your LLC FAQs
How does an operating agreement change how I add a partner to my LLC?
An operating agreement is a document that defines certain important aspects of your LLC, like who the owners are, how profits will be shared and who has the final sign-off of important business decisions. The agreement should also define the process for how to add new partners to your LLC.
This makes it the central point of reference when you want to bring in new partners. You should carefully review your operating agreement and discuss it with existing partners before bringing in a new member. Once you have added a new partner, check if you need to update your operating agreement.
In the absence of an operating agreement, an LLC will default to state law for where the state where you formed the LLC. This state law will define the process you need to go through to add a member. It’s always a good idea to get an operating agreement in place before you need it.
What are the most important areas where I should get agreement before adding a partner to my LLC?
Although you should get agreement across all aspects of your operating agreement, there are some areas where it’s especially important, particularly:
- Ownership: How the ownership percentages of the LLC will change, both for current and new partners
- Profits: How profits will be paid and shared between partners, and the percentages that each will receive
- Capital contributions: How much each partner has or will contribute to the business, especially for new partners coming in
- Assets and liabilities: How what the business owns and what the business owes will change
- Voting: How votes on important LLC decisions will be adjusted to take account of new partners
Make sure that you update your operating agreement with any changes and get it agreed and signed off by all partners, existing and new.
Do I need a new Employer Identification Number for my partnership?
If you’re a single-member LLC with an EIN and you become a partnership, you will need to get a new EIN from the IRS. Incfile can obtain a new EIN on your behalf. Multi-member LLCs won't typically need to change an EIN when adding a new member.
Will I need to dissolve and reform my LLC to add a new partner?
This depends on your operating agreement and state law. Be sure to check both, as some state laws may not allow LLCs to add new members — this may particularly be the case if you’re a single-member LLC and you want to become a multi-member LLC.
What are the tax consequences of adding a member to an LLC?
Taxes can change in several ways, depending on if you were formally a single-member or multi-member LLC.
If you’re a single-member LLC, here’s how your taxes will change. You will need to:
- File a Form 8832 Entity Classification Election with the IRS to tell them that you are changing from a single- to a multi-member LLC.
- File a Form 1065 U.S. Return of Partnership Income at tax time — your accountant can help you with this form.
- File a Schedule K with your Form 1040 tax return to show your partnership income — your accountant can help you with this form.
You may also need to file other forms and make further notifications to both the IRS and your state’s Department of Revenue. Talk to your accountant to learn more.