September 17, 2016

Adding A New Member To An LLC

I started my LLC in 2015, and I got an EIN for single-member. Now I need to add my dad to the LLC. So, I am going to get a new EIN?

Do I need to file form 8832 to notify them of the change from proprietorship classification to partnership-classification.

Since, partnership-classification is the default for multi-member do I need to file this form, or is getting a new EIN sufficient.

– Chirag, New Jersey

Answer

You don’t need a new EIN when you add members to an LLC (unless you never got an EIN for your LLC and were simply using your personal Social Security Number).

Merely changing tax classifications does NOT require a new EIN.

You will have to change your tax classification (using Form 8832 as you mention in your question) from single member disregarded entity to a multi-member LLC (partnership taxation).

From now on, you’ll be filing 1065 partnership returns, and giving each member (yourself and your dad) a K-1 from the 1065 stating your share of profits or losses to report on your own 1040.

When you add a new member to your LLC, be sure to document this in your written Operating Agreement. At the very minimum, you should document the following in writing:

  1. The consideration paid by the new member for admission to the LLC (e.g. money, services to be performed, contributions of equipment or real estate, etc.);
  2. The amount of membership units being acquired (i.e. “shares” of the LLC);
  3. The effective date of the transaction;
  4. Voting rights of the new member (are they proportional to the new member’s interest or is the new member passive with no voting rights?);
  5. Whether existing members have a right of first refusal to purchase the new member’s shares if one day he wishes to sell his membership units and how price of those shares would be calculated.

All of the above, and more, will be described in your new Operating Agreement: how membership units (shares) are allocated between you and the new member, how profits and losses are allocated, whether a member can sell his/her shares to an outsider without offering the other members right of first refusal, and many other issues.

Logistics of Adding a New LLC Member

While you are legally allowed to draft your own Operating Agreement without a lawyer, there are probably many issues you wouldn’t think of on your own. For example, how many of the five issues listed above did you think about before I listed them for you? Probably not all of them.

Therefore, it is a good idea to get some help with your Operating Agreement.

Back To LLC Questions & Answers