Change From Single Member LLC To Multi: Everything You Need to Know
A change from single-member LLC to multi-member LLC refers to the addition of one or more members to a limited liability company (LLC).4 min read
2. Reasons for Adding a New LLC Member
3. LLC Taxed as a Partnership
4. LLC Taxed as a C Corporation
5. LLC Taxed as an S Corporation
6. Adding a New Member to a Single-Member LLC
Updated October 27, 2020:
A change from single-member LLC to multi-member LLC refers to the addition of one or more members to a limited liability company (LLC). An LLC is a flexible business entity that has the freedom to choose its ownership structure and tax classification. Changing from a single-member LLC to a multi-member LLC has its pros and cons, which should be carefully weighed before making a decision.
What Is an LLC?
Similar to a corporation, an LLC is a business entity that is established under state law. It can be a single-member LLC with only one owner or a multi-member LLC with at least two owners. An LLC has a flexible ownership structure. For instance, one of its members may own a certain percentage of it but receive a different percentage of its profits.
The LLC business structure is a preferred option for many entrepreneurs because it ensures that their personal assets will be protected from liability and provides certain tax benefits. In an LLC partnership, the LLC will file a tax return and give out IRS Schedule K-1 tax forms to its owners, who will include the provided information in their personal tax returns.
Reasons for Adding a New LLC Member
There are many reasons to change from a single-member LLC to a multi-member LLC, including:
- You wish to take on a new business partner.
- You need someone to give you money to expand your business.
- You want to give an employee an ownership stake in your company as a reward.
LLC Taxed as a Partnership
If a single-member LLC adds a member and elects partnership tax status, it is subject to pass-through taxation. Its net profits and losses are passed through to the owners based on their ownership interests. All its incomes and expenses are reported on a separate tax return, IRS Form 1065. It does not have to pay taxes on its net profits. However, the owners of a partnership are required to pay taxes on the net profits of the company even if they do not receive profit distributions.
LLC Taxed as a C Corporation
If an LLC elects C corporation tax status, it is required to report all its incomes and expenses on a separate tax return, IRS Form 1120. Generally, owners of a C corporation who perform work for the company must take W-2 salaries. Salaries are subject to payroll withholding taxes and deducted by the company as business expenses. The owners usually take distributions of the company's after-tax profits as dividend distributions. The company does not deduct these distributions as business expenses. Both dividend distributions and W-2 salary are taxable personal incomes.
LLC Taxed as an S Corporation
An S corporation is also subject to pass-through taxation. It does not pay any tax on its net income and uses a separate tax return, IRS Form 1120S, to report all its incomes and expenses. It passes its net profits and losses through to its owners based on their percentage ownership interests in the company. The S corporation will report every owner's share of the company's net profit or loss on Schedule K-1 forms. The owners will then report the amounts shown in their K-1 forms on their Schedule E forms, or Form 1040.
Similar to a C corporation, an S corporation is required to pay a W-2 salary to any owner who works for the company. The salary is also subject to payroll withholding tax and deducted by the company as a business expense. While the owners must pay federal and state taxes on the share of net profits they receive from the S corporation, they do not have to pay self-employment tax.
Adding a New Member to a Single-Member LLC
If you want to add one or more new members to your single-member LLC, you are required to do the following:
- Add the names of the new members to your Articles of Organization.
- In your Operation Agreement, you need to explain how membership interests will change and what issues can potentially occur due to the addition of new members.
- If your single-member LLC has been paying taxes as a sole proprietorship, your accounting books and records must be closed when new members join your company.
- If your LLC adds new members during the tax year, you are required to file a short-year tax return for the current year.
If you need help with changing from a single-member LLC to a multi-member LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.