Adding Partner To LLC: Everything You Need to Know
Adding a partner to an LLC has many reasons that may be beneficial such as additional financial support for expansion, taking on a partner, replacing someone who has resigned or retired, or as a reward to an employee by offering him or her a stake in the ownership of the LLC.3 min read
Adding a partner to an LLC has many reasons that may be beneficial such as additional financial support for expansion, taking on a partner, replacing someone who has resigned or retired, or as a reward to an employee by offering him or her a stake in the ownership of the LLC.
Pros and Cons of Adding a Partner to an LLC
The process of adding a partner doesn't have to be complicated. Like any undertaking, there are a few things to consider and a few procedures to follow.
- One thing that makes an LLC so attractive is that it protects owners from personal liability.
- It's imperative that the structure of the LLC includes a formal set of procedures and thorough recordkeeping to maintain continued protection and to avoid any disputes that may arise among the LLC's owners.
- Adding a new partner can have both positive and negative effects.
- Adding a new member can impact the percentage of profits distributed to the original owners.
- The new owner adds another person with an opinion that will have direct input in decision making. If new owners have ownership interests, it may be difficult to remove them if their participation isn't beneficial to the LLC.
- When a single-member LLC adds a partner, the option to file taxes as a sole proprietor is no longer an option. Instead, the LLC will have to file taxes as a corporation or a partnership.
- On the plus side, filing as a partnership allows other options for making tax decisions not available to a single-member entity.
- With a partnership, the LLC formation earnings go directly to the members who, in turn, pay income tax on their shares. Earnings are "passed through" from the business to the members.
- A new partner is not legally bound to contribute financially, but this usually means he or she is not allowed any voting rights on important matters concerning the LLC.
- When a new member is added, a decision needs to be made about what role he or she will have. Members must decide if the person will be an investor or a managing member. A managing member falls under a different set of tax rules than an investor.
- It is recommended that an attorney knowledgeable in business be consulted to explain the ramifications of adding a new member to the LLC.
- For multi-member LLCs, a meeting with the existing partners allows a discussion of adding a new member prior to voting.
- Once a decision is made on how to structure the role/responsibility of the new member, the operating agreement will need to have an amendment added to include the new member.
Reviewing an Operating Agreement
While not required, it is highly recommended that an LLC create an operating agreement to outline the details of the operational structure and procedures.
- Information found in an operating agreement covers such areas as the roles and responsibilities of each member, allocation of profits and losses, how decisions will be made, and how changes to the business structure will be made.
- A notice of the operating agreement is provided to each existing member and as an amendment attached to the current copy of the agreement.
- By establishing an operating agreement and adhering to its rules and regulations, the LLC is seen as a well-organized independent entity.
- Be aware that by not having an operating agreement or not specifying how new members will be treated in your current operating agreement, the LLC must follow the procedure established in the limited liability laws of your state.
- Drafting an operating agreement is much easier than working out disputes without the benefit of established guidelines set up by the LLC members.
- Free operating agreement templates are available to guide you through the process to ensure what you create suits your business needs.
- You will need to decide on the specifics arrangements that will impact both the new partner and the existing partners.
- Discuss how the effects of each member's ownership percentages will be decided by the existing LLC members and the new member.
- The law of the state typically requires that a vote by existing members of the LLC must be unanimous to add a new member/partner unless the operating agreement provides a clause that a new member can be added with less than a unanimous consent.
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