Adding Partners to an LLC

By Lisa Magloff

A limited liability company, or LLC, may be formed with any number of partners, called members. New members may be added for a variety of reasons, such as wanting more capital to grow the business, needing someone with expertise in a new business area, or replacing a member who has retired or resigned. The requirements for adding a new partner depend on whether the LLC has one or more members, and the state where the LLC is registered.

Effects on a Single-Member LLC

Adding a new partner to a single-member LLC will result in the business becoming a partnership. Partnerships must file partnership tax return, and are also required to obtain an employer identification number from the IRS. Single-member LLCs can use the members' social security number for their taxpayer identification number, so adding a member will also require the LLC to obtain a new taxpayer identification number. Partnerships are also able to make tax decisions, such as amortizing organizational costs and choosing depreciation methods, that are not available to single-member LLCs.

Effects on a Multi-Member LLC

The existing members of the LLC need to agree on a number of factors, such as the buy-in amount for the member and what portion of the losses and profits the new member may claim. New members are not legally required to contribute financially to the LLC, but in most LLCs, members cannot vote on any matters of importance unless they have contributed financially to the company. Existing members also need to decide whether the new member will be a managing member or an investor, as managing members are treated differently for tax purposes. Most LLC state statutes and operating agreements require unanimous consent to add new members. Note that if the new members' contribution is deemed to be a sale of assets, their contributions may be taxable.

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Effect on the Operating Agreement

Many LLCs have an operating agreement, a contract that stipulates such factors as the buy-in amount and the duties or responsibilities of the various LLC partners. The operating agreement may also state how new members may be added. If your LLC does not have an operating agreement, you will need to follow the default rules and procedures set out in your state's LLC statutes.

Modifying Forms

If your LLC has an operating agreement, it will need to be amended or rewritten when you add a new member. This is because any financial contributions from the new member will need to be listed in the operating agreement, along with her share of interest in the company. In most states, the operating agreement can be modified by the members, although you may want to get legal assistance if your situation is complex. You will also need to add the new member onto the articles of organization that you filed with your state to establish the LLC. This can be done by filling out an amendment form and filing it with your state's business office or secretary of state's office. In most states this form can be filed online. You will also need to pay a filing fee.

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References

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How to Add a Partner to a LLC Using Sweat Equity

The existing members of a LLC have great flexibility to establish the procedures for the admittance of new members. As long as the LLC operating agreement doesn´t prohibit it, new members can join the LLC on the basis of "sweat equity," rather than having to contribute cash or property to the business. This means that a new member promises to perform services in exchange for an ownership interest in the LLC.

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An LLC, or limited liability company, is a flexible form of business entity that provides its owners with the safeguard of limited liability. An LLC can have any number of owners, known as members, so the entity is suitable for both sole proprietors and larger businesses. Although each state has its own laws for LLCs that are registered within its jurisdiction, the general rules regarding formation, limited liability, taxation and operation of the LLC are broadly similar.

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