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March 7, 2018

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 (Employment Identification Number) when adding a new member to a single-member Limited Liability Company. This is unless you never got an EIN for your LLC and were using your Social Security Number.

Changing tax classifications does NOT need a new EIN.

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

Before you were likely taxed as a disregarded entity or sole proprietorship and now you will file IRS Form 1065, a partnership tax return. Each member (yourself and your dad in this instance) will receive a K-1 from the 1065 stating your share of profits or losses to report on your own 1040.

When adding a member to an LLC, be sure to document this in your written Operating Agreement. Not all states require an Operating Agreement, but some do. Additionally, some states that don’t require one for a single-member LLC will for a multiple-member LLC. At the very least, 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 buy the new member’s shares. If a member wishes to sell their membership units, what is the formula to calculate the price of those shares?

All the above and more are often found in the LLC Operating Agreement. A few other topics to consider include:
– How to divide membership units (shares) between you and the new member
How to divide profits and losses
– Whether a member can sell his/her shares to an outsider. This can include offering the other members right of first refusal
– and many other topics.

After updating the Operating Agreement, verify if you need to file an amendment with the Articles of Organization. Some states require the filing of a form to amend the Articles of Organization, while others do not. This is usually handled through the Secretary of State. Some states handle adding new members by updating the annual report.

Logistics of Adding a New LLC Member

While a lawyer isn’t required to draft an Operating Agreement there may be issues not being addressed. For example, how many of the five issues listed above did you think about before I listed them for you? There are likely a few as this is a complex document.

So, it is a good idea to get some help with your Operating Agreement. Services like RocketLawyer have templates available to help get started.

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