How to Add a Partner to an LLC
A partner to an LLC is called a “member.” In order to add a new member to an LLC, the first thing that must be done is a review of the state articles of organization for the LLC (the “Articles”). In your review of the Articles, check to see if all members of the LLC are listed. If all members are listed, you need to file an amendment to the Articles in order to add another member. If all members are not listed in the Articles, there is no need to file an amendment.
In filing an amendment to the Articles with the state, simply search the state’s website for a form which allows for amendments to LLC articles of organization. Every state has a form like this. Typically, the form is 1 or 2 pages and requires submission via mail to the state, along with a check for around $30 to make the change. The amended Articles will be processed with the state, and the information contained therein will be public information.
Member interests in an LLC are called units. The second thing that must be done in order to add a new partner to an LLC is the drafting of a membership unit transfer agreement. This agreement transfers membership units from the other member(s) to the new member of the LLC, officially making the new member a partner in the LLC. The membership unit transfer agreement is an internal document which does not need to be submitted to the state or any other authority, but rather must be kept for your internal business files.
Finally, the operating agreement for the LLC must be updated in order to add the new member. The updated operating agreement should include all members; their ownership percentages; duties and responsibilities; distributions; share of profits and losses; and voting rights. The operating agreement, like the membership unit transfer agreement, does not need to be submitted to any authorities, but rather is kept for your internal files.
From an IRS tax reporting respective, there are additional forms that must be filed in the event that adding the new partner changes the LLC from a single-member LLC to a multi-member LLC; that is, there are additional forms that must be filed in the event that there was only one partner in the LLC before the new partner was added.
First, a Form 8832, Entity Classification Election, must be filed in order to notify the IRS that the LLC has changed from a single- to a multi-member LLC. Second, now that the LLC has two or more members, it is considered a partnership, as opposed to a disregarded entity, with the IRS. Thus, the LLC must now file a Form 1065, U.S. Return of Partnership Income, annually with the IRS. Finally, Schedules K-1 must now be filed by each partner and attached to their Form 1040, Individual Income Tax Return, each year in order to report the partners’ distributive share of partnership income.
