Conversion Process from Single-Member to Multi-Member LLC
To convert a single-member LLC to a multi-member LLC, you’ll need to check with the secretary of state, who is responsible for business filings. Most states require adding a new member in the articles of organization, where you can outline the procedure for adding new members. Obtain consent from the existing single member.
Basic Steps to Form a Multi-Member LLC
- Choose a business name.
- Apply for an employer identification number (EIN).
- Draft an operating agreement outlining procedures for adding members.
- File required paperwork with your secretary of state.
Adding a member changes the LLC’s tax status from a disregarded entity to a partnership unless it’s currently taxed as a corporation. Multi-member LLCs are taxed as partnerships, and the profits and losses are shared among members.
Reasons for Adding Members and Tax Consequences
- Bringing on a new business partner
- Requiring capital to expand
- Giving an employee shared ownership
Tax Implications
When you add a member, and the LLC elects to be taxed as a partnership, it adopts pass-through taxation, with all income and losses reported on IRS Form 1065, and members pay their share of taxes on the profits.
Operational Changes
To officially convert your LLC:
- Issue shares to new member
- Notify the secretary of state
- Notify the IRS
- Draft an operating agreement specifying member addition procedures
Watch out for tax implications and ensure to manage quarterly filings, as you’ll now file taxes as a partnership.
LLC Ownership Types and Classification
- A single-member LLC is simpler for taxes as no federal tax return is required unless chosen to be treated as a corporation.
- Changing an LLC from multiple members to a single member involves the sale of interests from exiting members to one, with requisite tax election changes.
- LLCs can either be single-member or multi-member.
- The term for an LLC with two or more owners is an MMLLC or Multi-Member LLC.
- Conversion to a partnership requires filing Form 8832 with the IRS if your LLC already has an EIN.
- Location-specific rules, like Delaware, may have unique requirements for LLC ownership changes.
Choosing between a single or multi-member LLC involves considering ownership, asset protection, management, tax treatment, and compliance. Adding a member to an LLC can affect these elements and varies by the state in which the company is formed.