Adding a partner to LLC
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Adding a partner to LLC
I have an LLC and am thinking about adding a partner. What is the procedure for
doing this? Are there filings that need to take place? Are there risks involved?
Asked on April 3, 2018 under Business Law, Michigan
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 3 years ago | Contributor
You don't need to file anything. To do this, you need to create an operating agreeement (or amend an existing one) to reflect the relative ownership percentages. LLC ownership is set by agreement or contract--i.e. the operating agreement. You can sell some of your interest in the LLC to the partner, or give it to him/her, or have him/her earn it by working for the LLC, etc. There are different tax consequences for him/her and you to the different ways of giving him/her the share of the LLC (e.g. selling vs. gifting), and you should speak with an accountant before doing this.
There are legal and practical questions you also need to think about before you do this, such as:
1) Are you giving up half your interest, so you will be be 50-50 owners? If so, what happens if the two of you deadlock or disagree--how is a decision made?
2) Suppose you decide you don't want to keep him/her as a partner, or he/she wants out--can you force him/her to return or sell back his/her interest to you, and, if so, for what amount? Or can he/she force you to buy him her out?
3) Taking money out of the LLC, either as distributions or salary/wages--once there's another person involved, you can't do this at your whim; you need to determine this ahead of time and make sure you both agree.
There are other issues, too, to consider, but you get the idea--all the things that you could do on your own before, now need to be determined and spelled out in advance in a written agreement, so there is no dispute over power, authority, finances, etc. And you need to figure out in advance how the LLC can be dissolved or ended, or at least one of you removed from it, if that is what one or both of you wants. Consult with a business attorney; the lawyer can help you think through all the issues and draft the operating agreement.
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