Whether you're bringing on a business partner or expanding ownership, adding a member to your LLC requires important legal, tax, and administrative steps that you must handle carefully.
What are the tax consequences of adding a member to an LLCa?
The tax implications of adding a new member to your LLC depend on how your LLC is taxed by the IRS.
The IRS automatically considers a single-member LLC as a disregarded entity. This means the LLC’s income and expenses are typically reported on the owner’s personal tax return, similar to a sole proprietorship. If your single-member LLC has no employees and doesn’t file excise tax returns, you may be able to use your Social Security number (SSN) instead of an Employer Identification Number (EIN).
Adding a second member generally changes the LLC’s federal tax classification from a disregarded entity to a partnership, unless the LLC has elected to be taxed as a corporation. This typically means you’ll need to:
- Obtain an EIN. If you previously used your SSN for federal tax purposes, you’ll generally need an EIN for the LLC.
- File IRS Form 1065 each year. For calendar-year partnerships, the return is generally due March 15.
- Provide each member with a Schedule K-1. Members use this form to report their share of the LLC’s income, deductions, and credits on their individual tax returns.
If you already operate a multi-member LLC taxed as a partnership, adding another member generally will not change its tax classification or require a new EIN.
If your LLC has elected to be taxed as an S corporation, adding a member generally does not affect that election. However, the new member must meet S corporation eligibility requirements. For example, the LLC cannot have more than 100 shareholders, and the new member generally must be a U.S. citizen or resident alien and cannot be an ineligible shareholder, such as a partnership or corporation.
Steps to add an LLC member
Adding a member to an LLC involves several legal and administrative requirements. While the process varies by state and the structure of your LLC, it generally includes the following:
1. Review the operating agreement
Start by reviewing your operating agreement. It may explain how new members can be added and what you need to do to approve the change.
Check your operating agreement for details such as:
- Member approval: How many existing members must agree to add the new member.
- Ownership contribution: What the new member must contribute to the business in exchange for their ownership share.
- Voting and management rights: What say the new member will have in business decisions and whether they will have a role in managing the LLC.
2. Agree on key terms
Once you know what approvals are required, the existing members should agree on the terms for bringing in the new member. Be clear about:
- Ownership share: What percentage of the LLC the new member will own.
- Contribution: What they will contribute in exchange for their ownership share, such as money, property, or services.
- Voting and decision-making rights: How much say they will have in business decisions.
- Profits and losses: How the LLC’s profits and losses will be divided.
- Leaving the LLC: What happens to the member’s ownership interest if they leave the business.
3. Prepare and approve an operating agreement amendment
If your LLC doesn’t have an operating agreement, consider creating one. An operating agreement sets clear expectations for how the business will be run, helps members understand their rights and responsibilities, and can help prevent future disagreements.
If you already have an operating agreement, update it to reflect the addition of the new member. The amendment should:
- Document the new member’s terms, including their ownership percentage, contribution, and voting rights.
- Get the required member approval. Check your operating agreement and state law to determine how many existing members must approve and sign the amendment.
- Keep the signed amendment with your LLC records, with your original operating agreement.
- Update your ownership records with the new member’s name, ownership percentage, and admission date. This information typically isn’t filed with the state, but you should keep it with your business records.
4. Update state records
Depending on your state, you may need to update your LLC’s state filings when you add a new member. Requirements vary:
- Some states require an amendment. You may need to amend your LLC’s articles or certificate of organization to report a change in members or managers. For example, in Arizona, a member-managed LLC must file an amendment within 30 days of adding a new member. Failing to file can lead to administrative dissolution, which means the LLC loses its authority to operate.
- Other states let you report the change through a regular state filing. In California, for example, changes to members or managers are reported on the LLC’s Statement of Information. LLCs file this statement every two years and can also submit an updated statement when information changes.
- Check the requirements in every state where you do business. Review your state’s Secretary of State or business filing agency requirements to determine whether you need to file an amendment, update an annual or biennial report, or take no immediate action.
- Don’t forget other states where your LLC is registered. If your LLC is foreign qualified to do business in other states, check whether those states require you to update your registration when membership changes.
LLC requirements vary by state, so always verify filing obligations with the state where your LLC was formed and any state where it is registered to do business.
5. Notify the IRS
You may also need to notify the IRS when you add a new member. What you need to do depends on your LLC’s tax classification and whether the person responsible for the business is changing.
- Check your EIN requirements. If your single-member LLC doesn’t already have an EIN, you’ll generally need to get one when you add a member. If you already have an EIN, consult a tax professional to determine whether you need a new one.
- Report a change in the responsible party. If the new member becomes the LLC’s responsible party, notify the IRS within 60 days by filing Form 8822-B (Change of Address or Responsible Party).
- Know who the IRS considers the responsible party. This is generally the person who ultimately owns or controls the LLC and has authority over its funds and assets.
6. Notify your bank and vendors
Once you’ve added the new member, make sure your bank and other organizations you do business with have the right information.
- Update your bank records. Let your bank know about the ownership change and add the new member as an authorized signer if needed. If your LLC received a new EIN, update your bank records and check whether you need to open a new business account.
- Review contracts and licenses. Check vendor contracts, client agreements, business licenses, and other important documents to see whether you must report or have the ownership change approved.
- Update your EIN where needed. If your LLC received a new EIN, provide it to vendors, clients, state tax agencies, and others that have your previous EIN on file.
Navigate LLC changes with confidence
BizFilings is dedicated to making business easier so you can focus on doing what you love.