How to Add an Entity to an Existing LLC

By Larissa Bodniowycz, J.D.

How to Add an Entity to an Existing LLC

By Larissa Bodniowycz, J.D.

One of the advantages of a limited liability company (LLC) over a sole proprietorship or most partnerships is that other business entities, such as other LLCs and corporations, can be LLC owners. Even if a business entity is not one of the initial LLC owners, it can later become a member through actions taken at the entity, state, and federal levels.

Businesspeople talking at conference table

Actions Required at the LLC Level

The first steps toward adding an entity as an owner, also called a member, begin with the LLC itself. LLC operating agreements often have rules for adding new members after the initial formation of the company. For example, existing members may have to unanimously vote to accept a new member. This is not a big issue if there's only one member, but with multiple members, reaching an agreement can sometimes take some negotiating. There might also be specific rules in the operating agreement for adding entity, rather than individual, members to the LLC. To add the entity to the LLC, simply follow the rules set out in the operating agreement, and be sure to properly document the process.

Most operating agreements include a list of the LLC's members and their initial contributions to the LLC, so the operating agreement will probably need to be updated to reflect the addition of the entity and its contribution.

Actions Required at the State Level

The state where the LLC operates must receive notification of the addition of the entity as a new LLC member. Ordinarily, this update appears on the LLC's next scheduled annual report or statement of information. However, in some situations, like if the new entity will be a managing member, you may also need to amend the LLC's articles of organization. You do not need to provide the state a copy of your amended operating agreement, as an LLC's operating agreement is an internal document.

Actions Required at the Federal Level

If the addition of the entity changes the LLC's tax status, you also need to update the Internal Revenue Service (IRS). In most cases, if the LLC changes from a single-member LLC to a multi-member LLC, the tax classification changes. Whether it changes if the LLC was already a multi-member LLC depends on the tax classification the LLC originally chose. If you are uncertain whether the change impacts your LLC's tax status, don't guess—consult your accountant.

If you do need to update the IRS, you can do so using the relatively simple Entity Classifications Election (Form 8832).

Exceptions

Although business entities can usually become members of existing LLCs, there may be restrictions or even prohibitions in your LLC's governing documents or in state or federal law. For this reason, it is important to review your LLC's governing documents, the laws of the state where the LLC was formed, and applicable federal laws to make sure adding the entity to the LLC is permissible.

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