When growing your Limited Liability Company (LLC), you may come to the point where you want to add a partner (or partners) to help you scale your business. Whether you’re looking for an injection of capital, some with specialized knowledge or skills, or want to reward loyal employees, adding new LLC partners is fairly simple as long as you follow the rules required by your state and as stated in your LLC operating agreement.
LLC owners are called members, so when you’re adding new partners, you’re actually adding new members to your company. How you add partners depends on the kind of LLC you currently own, what state (or states) you operate your business in, and the data that was initially submitted in your original formation documents.
The Reporting Impact of Adding LLC Partners
In general, adding new members to your LLC does not require notifying the Internal Revenue Service (IRS). That said, there are some situations to be aware of.
These situations could change how you report income after modifying LLC ownership:
- As a single-member LLC, a company is considered a disregarded entity, with all business profits and losses reported on your personal tax return. Multi-member LLCs are taxed as partnerships; therefore, going from a sole owner to multiple owners changes the company’s tax classification and requires partners to file IRS Form 8832.
- In addition, a change in ownership may require your LLC to obtain a new Federal Tax ID Number or Employer Identification Number (EIN). Check with your accountant or the IRS to see if you need a new number to proceed.
Updating the Operating Agreement
Similar to corporate bylaws, which document a corporation’s organizational structure and policies, LLCs need an operating agreement. This document generally covers the contributions of members, the rights of members, the obligations of the members, and the process of income distribution to members.
Although states do not require LLCs to file their operating agreement with the state government, many require LLCs to always have an updated operating agreement on hand if needed.
When an LLC is initially formed, the operating agreement is drafted and all members must sign it for it to be effective and valid. The operating agreement should define key business decisions such as adding new members. If no operating agreement exists, the LLC must follow the state’s procedures for adding new members.
Essentially, adding a new partner or partners to an LLC requires:
- Amending the LLC’s operating agreement by drafting a resolution and having the current LLC members vote on the resolution.
- To pass the resolution, all LLC members must vote in favor of it.
- Once the resolution is approved, the operating agreement needs to be amended to include the new partner’s name, address, financial contribution, and participation responsibilities.
State Requirements for Adding a Partners
Because LLCs are state-governed entities, your state may require you to take additional steps to add partners to your LLC.
For example, here are a few state requirements to look out for:
- If your state requires the names of LLC members to be recorded in the formation documents (Articles of Organization), you must file an amendment with the state and pay the filing fee.
- If your state requires LLCs to file an annual report, you must add the partners’ names by the annual report’s due date.
- For LLCs conducting business in multiple states, your company had to file for a foreign qualification in each state by submitting a Certificate of Authority application form and paying the required fees. You need to review each state’s requirements if foreign qualification applies.
- If you’re operating in multiple states, at the time of formation you were required to appoint a registered agent in each state because your company’s headquarters are not in the state. The registered agent handles in-state processes on behalf of the company. Therefore, when you add partners to your LLC, you’ll likely also need to amend your out-of-state documents by informing each of your registered agents.
We’re Here to Help
Need help staying in compliance when adding partners to your LLC? CorpNet can help you prepare the necessary documentation to keep your business in compliance.
Visit our business filing services to see a complete list of functions we can help with. From filing Articles of Amendments to Conversions, we can help make the entire process fast and easy.