How to Add a Partner or New Member to an LLC
Adding a new partner or member to an LLC is not a decision to be taken lightly. The business structure will change, regardless of how smooth the transition is, and paperwork is required to make the addition legal. Before you invite a new partner to your LLC, it is best to consult with a small business attorney who can advise you about how to proceed.
Single- or Multi-Member LLC
A multi-member LLC is treated as a partnership for tax purposes, which means that the partners have created a business entity as far as the IRS is concerned. A single-member LLC, however, is not considered an entity, so tax filings will have to change when a single-member LLC brings on a partner.
When you add a partner or member to an LLC, you will need to file taxes as a partnership. This type of organizational structure requires that profits and losses pass through the entity or business to the member(s).
Obtaining an EIN
Partnerships also require an Employer Identification Number for tax purposes. Some single-member LLCs use the owner's social security number when filing taxes (which we don't recommend), but this is no longer appropriate when you add a partner to the LLC.
The IRS requires partnerships to obtain an EIN, even if an EIN was owned by the sole proprietor prior to bringing on a partner.
Amending the Operating Agreement
When an LLC brings on a partner or new member, changes to the operating agreement are necessary. You will need to specify the economic and procedural expectations for the new member as well as profit share. It should include the investment put forth by the new member - either the sum total of the money invested or the value of the property contributed. This should all be agreed upon before beginning the official paperwork.
Include the expected return-on-investment (ROI) for a new member who will be contributing either money or real property. Although this might change over time, it is important to set up reasonable expectations so everyone is clear on how they will operate together.
Devise a Contract
An attorney can help you devise a contract between all partners in an LLC. This is a separate document that outlines the expectations for all members as well as how they will be compensated. It should include the time requirements for all partners (e.g. part-time, full-time), and any other agreements between the parties.
One of the most important elements of a contract between partners of an LLC is the exit strategy. This is an agreement on how any single partner will be let go of the LLC, whether it is his decision or the other partners'. Include provisions for what happens to a member's interest in the LLC if he or she were to pass away (e.g. passed to family members; distributed among other partners).
Resubmit Operating Agreement
Depending on where your LLC was formed, you might have to submit your amended operating agreement to the state. Once again, a tax or small business attorney is invaluable in handling the addition of a partner or new member to an LLC.
Buyer, Beware in Purchasing a Small Business
Buyer, beware. Are you looking to purchase a business? Are you in the process of purchasing a business? In this section, we will address some key things to look out for that can protect you and potentially save you thousands of dollars.
Purchasing a business is very exciting. You have been waiting to be your own boss and now the time has come. You believe in your ability to grow a business or turn around a mediocre business. You are right to believe in yourself and your abilities. How you believe and what you say and the choices you make will determine you future.
Your situation today is a result of choices you have made along the way. And now you are ready to make a huge decision and you can make it with great wisdom. Follow the insight in this article and you will have a much higher probability of being successful in your venture. Many people purchase a business without covering themselves properly but you can take the biggest step in your life with assurance that you will not be one of the statistics that do not make it.
OK, so let's get started.
1. I cannot stress this first point enough. Get legal representation. Hire a lawyer to represent you throughout the transaction. There are many legal web sites where you can put together a contract and get legal advice. However, these should not be used as a substitute for legal representation. Lawyer fees can range anywhere between $500 and $5,000 for a small business depending on the nature of the business as well as local, state and federal requirements, but it is a must. Please do not attempt to purchase a business without a lawyer. It is tempting to save the legal fees, after all you have to pay for advertisement, utilities, governmental fees... but do not fall into this trap. Do no skip this step.
2. If you hire a lawyer and I suggest that you do, this step will be taken care of by him/her. However you can make sure that this step by your lawyer: call Bulk Sales in your state. This is very important if you are purchasing a business and operating the previous owners equipment out of the same location. If there are any state taxes or liens due then Bulk Sales will identify them. Once they are identified through Bulk Sales an escrow account can be established and the previous owner can cover taxes due prior to sale. The state can hold the new owner responsible if the previous owner has not paid their sales tax. Therefore Bulk Sales is key. Search the Internet to learn more about Bulk Sales or contact you state.
3. Obtain an accountant and form the business properly. Your accountant can help you with this. There are several options in establishing a business such as a LLC, Sole Proprietorship, S-Corp, and others. You do not want to be held liable for business debt. You do not want your house to be in jeopardy if something should go wrong. This step is vital.
4. Why is the business for sale? Do not take the next step until you answer this question objectively. Some sellers have said, "I am selling to move to a different state to take care of my sick dad." This may or may not be true. Look at how the business is performing. It is very hard to be objective without help from others. First rule to being objective about the potential business is to hire an accountant to look over the books. Are the books legitimate? The sales tax paid should match their personal books. If they say that they do not report all of their sales then you know already that they can and will lie to the state so therefore they also have the potential to lie to you. This raises a red flag. Is the business is being sold because they can not make enough to cover stay afloat? For example, if it is a restaurant, look at the cost of food. Comparing last years numbers is OK but you also have to incorporate in the rising cost of food and gas. Your accountant will help you determine if the reason for the sale is because of the financials.
5. Do a credit check on the current business owner. If he/she does not allow you to then there could be come cause for suspicion. If a business is doing very good then that should be reflected in the credit report. This is not a huge step but it can not hurt to ask.
6. Establish a Due Diligence period and take your time during this Due Diligence period. Due Diligence is a time where you have access to their books, financial records, etc. Do not rush this time. For many businesses a whole month is recommended. During this month you should be in the place of business working along side of the owner, manager, and technicians. Ask a lot of questions. Do not be afraid. They should answer everything you want to know. Look for inconsistencies from what the sellers tell you and what the books say. Speak with distributors and clients when possible. Work the hours that the owner works. If the owner is there from10:00 am until 11:00 pm then you work those same hours.
7. Make sure you have enough operating capital. Calculate the money that you will need for several months. Do not put yourself in a position where your electric is going to be shut off or you can not pay your employees. Also make sure that you calculate things like daily gasoline expenses to and from the shop or utility deposits which can be an additional $1,000.00 or more.
8. Objectively evaluate the business. Many counties have free help for small businesses. These organizations usually have men and women who are currently or previously were business owners. This is a great resource for individuals starting a business. They will help you objectively evaluate the business. Your accountant will give you an objective look at the financial. There are also tools on the Internet to evaluate a business.
9. Do not rush into a purchase no matter how excited you are. Take your time and enjoy the process. Have fun and follow after peace and use wisdom in each decision making step.
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All information in this article is based on the authors opinion and does not constitute legal or financial advice.