Changing from a Single-Member LLC to a Multi-Member LLC is a common way for business owners to expand their businesses.
The process of changing your LLC from a single-member to a multi-member is not difficult, but there are some important steps you need to take in order to make the change. But first, let us walk you through the characteristics of a single-member LLC.
What is a Single Member LLC?
This type of LLC offers the same limited liability protection as a multi-member LLC, but it is much simpler and less expensive to set up.
Since a single-member LLC is owned by a single person, it does not have a board of managers.
There is only one member, and that member has the right to make all business decisions unilaterally.
The main advantage of a single-member LLC over a multi-member LLC is its cost – it's much cheaper to operate a single-member because there's no need for additional members or officers.
The designation of a single-member LLC is made in the Articles of Organization when filing with your state, so it's hard to miss. Other than filing fees, which vary from state to state, there isn't much difference between the cost of setting up a single-member LLC and a multi-member.
But what happens if you change your mind and want to convert your single-member LLC into a multi-member?
Converting into a Multi-Member LLC
There are a few reasons why you might want to add a new member into your LLC and change it into a multi-member LLC.
Perhaps you've decided you need more help managing the business through partnerships, or maybe you're looking to attract new investors. However, there are a few things you must put into consideration during the converting process.
Contracts and Operating Agreement:
Before you can expand your LLC and add a new member, you must first amend the Articles of Organization. This is typically done through an Operating Agreement or Written Consent from all existing members.
Your state may require that the operating agreement be recorded with the Secretary of State before it is accepted and implemented by your LLC.
Be sure to check whether there are any specific requirements in your state for the approval of an amendment.
Membership Transfer Rights:
The Operating Agreement should also include the details of any membership transfer rights and membership interest, including restrictions on sales to non-members.
Be sure that you follow the state law, rules, and regulations regarding how a member can sell his or her interest in the LLC.
State The Specifics of Your Expanded LLC:
Once you've decided on the Operating Agreement, the next step is to file your articles of amendment with your state.
When preparing an amendment for increasing LLC members, be sure to provide accurate numbers and avoid using abbreviations in your operating agreement. If you don't, it may cause unforeseen problems that are difficult to unravel.
The state will then go through its approval process, which can take anywhere it may delay the process or even lead to rejection of your filing.
Be sure you understand how your state treats single-member and multi-member entities, so you know whether an Operating Agreement or a separate entity is necessary (such as a corporation, partnership, or trust).
Remember, the key to converting your single-member LLC into a multi-member is having proper legal documentation reflected in your operating agreement. Of course, state rules and regulations may vary from those outlined here, so be sure you check with a law firm that specializes in this area if you're not sure how to proceed.
Depending on the state law in which your Limited Liability Company is registered, you may also be required to notify other agencies when expanding your membership.
For example, if you add a member who will have an ownership interest in your LLC, you'll need to file a new Form 1065 with the IRS. This is the tax return that reports the business' income, deductions, credits, and other tax items.
Tax Consequences of Adding a Member to an LLC:
As with any business decision, there are tax consequences to adding a member to your LLC.
Unlike most property exchanges, contributing funds to an LLC in exchange for membership interest is not subject to tax gain or loss for the parties concerned.
That's because, for tax purposes, an LLC is considered a disregarded entity, so ownership changes do not result in federal taxes; however, when you do add a partner, you will be taxed as a partnership and must file a Schedule K-1.
This is how members will be taxed for their share of LLC net income or loss on Form 1065.
For example, a new member might cause the business to generate more taxable income or trigger state income taxes on a new entity. Furthermore, certain states will require a separate filing for LLCs that have multiple members.
In any case, it is essential to seek legal advice from a law firm or from a tax professional before changing the make-up of your LLC.
Is It More Beneficial For an LLC To Be a Single-Member or a Multi-Member?
Sometimes it may be beneficial to convert your LLC into a multi-member or different type of business entity if:
- You want to find funding from venture capitalists or angel investors
- You plan to expand outside your home state
- You have employees
- Your company is growing too fast for a single-member LLC
- You are sued or want to sue someone
Converting Limited Liability Companies to multi-member LLCs can offer some liability protection if you're worried about being personally sued. Additionally, it can issue shares of stock, which could be attractive to potential investors.
Do I need a new Employer Identification Number if I change from single-member LLC to multi-member LLC?
You will need a new EIN if you add a new member, but not if the ownership percentages stay the same.
Can you convert an LLC to a partnership?
Yes, you can convert an LLC to a partnership when you add a new member, but there are tax consequences involved. Partners will be taxed on their share of LLC net income or loss on Form 1065. You must also file a Schedule K-1 for each partner.
Change From Single Member LLC To Multiple Member LLC...
To summarize, you can always add members to your LLC. But if you do, be sure that it is in accordance with your state's laws regarding LLCs and that you understand the tax consequences and tax benefits of adding a new member.
If you are unsure of what is best for your company, it is always a good idea to consult with a tax professional.