How to Add a Partner to an LLC

When business owners talk about adding a “partner” to their company, what they typically mean is admitting a new member to an existing limited liability company (LLC). This is not an informal process. Membership changes in an LLC are governed by state law and by the LLC’s operating agreement, and must be carried out with proper documentation to avoid future disputes. In Delaware, for instance, the Delaware LLC Act § 18-301 makes clear that a new member is only admitted in accordance with the terms of the operating agreement or, absent such terms, with the consent of all existing members.

The first step in admitting a new member is to review the LLC’s current operating agreement. Most agreements contain provisions describing how new members may be added, including whether unanimous consent is required and what capital contribution the new member must make. Once the procedure is identified, the next step is to prepare an amendment or addendum admitting the new member. This document should state the member’s name, contribution amount, ownership percentage, and the resulting changes to allocations of profits, losses, and distributions. All existing members should sign the amendment to make it effective.

The operating agreement itself must then be updated to reflect the change in ownership. This often involves adjusting schedules of members and ownership percentages, modifying voting and decision-making provisions, and clarifying any new rights or restrictions that apply to the incoming member. If the LLC is registered in a state that requires public filings, such as Delaware or New York, it may be necessary to file an amendment with the Secretary of State to update the company’s records.

Admitting a new member also carries tax implications. Under IRC § 704(b), capital accounts must be properly adjusted to reflect the new contribution and ownership allocation. If the LLC has made a § 754 election, the admission of a new member may trigger a basis adjustment in the LLC’s underlying assets. Furthermore, the LLC’s Form 1065 partnership tax return must be updated to issue a Schedule K-1 to the new member, reporting their share of income, deductions, and credits. If the LLC was previously a single-member LLC treated as a disregarded entity, it will automatically convert into a partnership for tax purposes once a second member is admitted.

In short, admitting a new member to an LLC requires careful attention to contractual, statutory, and tax requirements. It is not enough to simply “shake hands” and agree informally. To avoid disputes and ensure enforceability, the admission process should always be documented, the operating agreement updated, and tax filings aligned with the new ownership structure.