How To Change A Single Member LLC To Multi Member? (Guide)

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: April 24, 2024
Methodology
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Changing your Limited Liability Company (LLC) from a single-member to a multi-member is not difficult, but there are some essential steps you need to take to make the change.

As a seasoned business consultant with years of experience, I have extensively explored the intricacies of LLC formation and sought guidance from industry experts.

In this article, I’ll provide first-hand advice from attorneys, legal advisors, and other experts on changing a single-member LLC to a multi-member.

Join me as we delve into the critical aspects of this transformation, ensuring you make informed decisions every step of the way.

Quick Summary

  • To change a single-member LLC to a multi-member LLC, review the operating agreement, obtain consent from the existing member, and bring in new members.
  • You’ll also amend the operating agreement and the Articles of Organization.
  • According to the IRS, about 30% of businesses annually update their EIN due to changes like restructuring or ownership shifts.
  • I always emphasize that the biggest benefits of this process include increased capital, a broader network, enhanced decision-making, and reduced individual liability.


Steps to Change a Single-Member LLC to Multi-Member LLC

A man renegotiating a Wisconsin LLC operating agreement

From my legal experience, changing a single-member LLC to a multi-member LLC involves specific steps to ensure a smooth transition and compliance with legal requirements.

Follow these steps to navigate the process successfully:

1. Review the Current Operating Agreement

Begin by reviewing the existing operating agreement of the single-member LLC. Understand its provisions regarding admitting new members and the procedures for making changes.

This step provides a foundation for the upcoming modifications.

"If there are any changes to member details such as names, addresses, or ownership percentages, it's essential to update your LLC operating agreement accordingly, as outlined in the agreement itself."

- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter

Seek the consent of the current single member to admit new members and convert the LLC to a multiple-member structure.

This step involves discussions, negotiations, and obtaining written consent or agreement from a current member.

3. Identify and Bring in New Members

Identify potential new members who will join the LLC.

For my first LLC, I considered individuals or entities that aligned with the LLC's goals and objectives.

Add new members by executing membership interest transfer agreements and updating the ownership structure.

4. Amend the Operating Agreement

Prepare and execute an amendment to the operating agreement to reflect the changes in membership. Clearly outline the rights, responsibilities, and obligations of each member.

Ensure the amended operating agreement is legally binding and complies with relevant state laws.

File the necessary paperwork with the state agency responsible for business entities, such as the Secretary of State or State Corporation Commission.

In my case, I updated the LLC's formation documents, such as the LLC Articles of Organization, to reflect the new multiple-member structure.

6. Notify Relevant Agencies and Authorities

Inform relevant agencies, such as the Internal Revenue Service (IRS), about the LLC structure change.

Update tax filings and forms to reflect the transition from a single-member to a multi-member LLC.

7. Update Taxation and Financial Accounts

Revise the LLC's taxation and financial accounts to accommodate the new multi-member structure.

Update the Employer Identification Number (EIN)  with the IRS if necessary. According to the IRS, approximately 30% of businesses update their EIN annually due to changes like restructuring or ownership shifts.

Open an LLC business bank account that reflects the new ownership structure and ensures separate financial management.

What Are the Benefits of Changing a Single-Member LLC to a Multiple-Member LLC?

Changing a single-member LLC to a multiple-member LLC can bring several benefits and opportunities.

Here are some key advantages:

  • Increased Capital Infusion: Adding a new member to an LLC brings in additional funds, enabling the company to finance growth, invest in assets, or expand operations.
  • Broader Network and Business Connections: New members contribute their network and connections, opening doors to potential clients, partnerships, and opportunities for the LLC.
  • Enhanced Decision-Making Capabilities: Additional perspectives and insights from new members lead to better-informed decisions and strategic planning for the LLC's success.
  • Reduced Individual Liability: All members of an LLC enjoy limited liability protection, shielding personal assets from business debts and obligations.
  • Potential for Increased Profitability and Growth: Adding new members can increase resources, expertise, and opportunities, potentially driving higher profits and facilitating the LLC's growth trajectory.
  • Tax Flexibility: Multiple-member LLCs can be taxed as a partnership, providing potential tax advantages and flexibility in income distribution.
  • Lower Self-Employment Tax: Adding members allows the LLC to allocate profits differently, potentially reducing overall self-employment tax burdens.
  • Sharing of Responsibilities: Multiple members allow for the division of management duties, reducing the workload and promoting specialization.
  • Diverse Skills and Resources: Additional members bring varied expertise, knowledge, and resources, strengthening the overall capabilities of the LLC.
  • Enhanced Business Credibility: A multiple-member LLC may be perceived as more established and credible, potentially attracting more customers and business opportunities.
  • Clear Operating Agreement: Multiple-member LLCs benefit from a detailed LLC operating agreement that outlines ownership rights, responsibilities, and decision-making processes.
  • Potential Corporate Tax Status: Adding members can allow the LLC to elect corporate tax status, providing unique tax advantages and potential savings.

Single Member Vs. Multiple Member LLCs

A person writing a note and changing single member LLC to a multi member LLC

Single-member LLCs offer simplicity and flexibility as they are easier to set up and manage. On the other hand, multiple-member LLCs allow for shared ownership and can provide more resources, expertise, and financial stability.

Here are a few phrases that can help distinguish a single-member from a multiple-member LLC:

Taxation

In a single-member LLC, the owner reports business profits and losses on their personal income tax return (Form 1040) [1]. The LLC itself does not file a separate tax return.

In a multiple-member LLC, the LLC files a partnership tax return (Form 1065), and each member receives a Schedule K-1 reflecting their share of profits and losses [2]. LLC members then report this information on their individual tax returns.

Self-Employment Tax

The owner of a single-member LLC is responsible for paying self-employment taxes, which include both the employer and employee portions of Social Security and Medicare taxes.

Members of a multiple-member LLC also pay self-employment taxes on their distributive share of the LLC's profits.

Corporate Tax Status

A single-member LLC is classified as a disregarded business entity for tax purposes by default. This means that it is treated as a sole proprietorship.

On the other hand, multiple-member LLCs are classified as partnerships for tax purposes. However, a multi-member LLC can be taxed as a corporation by filing Form 8832 with the IRS [3]. According to the IRS, about 20% of multi-member LLCs opt for this tax classification change to benefit from corporate tax structures.

FAQs

Do I Need a New Employer Identification Number if I Change From a Single-Member to a Multi-Member LLC?

You will need a new Employer Identification Number if you change from single to multi-member LLC. But if the ownership percentages stay the same in the latter, you’ll not need an EIN.

Can You Convert an LLC to a Partnership?

You can convert an LLC to a partnership when you add a new member, but consequences are involved. A business partner 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 business partner.

References:

  1. https://www.irs.gov/taxtopics/tc407
  2. https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf
  3. https://www.incorporate.com/starting-a-business/form8832/

About The Author

Author
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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