How to Add a Partner to an Existing Business

Make sure the partner is right for the business

While you may like an individual personally, you must consider whether they will be good partners. Of course, both partners do not need to be exact copies of each other. A successful partnership is built by balancing one another’s weaknesses and strengths. If, for some reason, you feel nervous about the person you are thinking about partnering with, pay attention to that feeling. You may wish to consult with a commercial litigation attorney for concerns on partnership disputes before adding a partner to your company. Consider their feedback and consider whether the decision is best for the company.

Change an LLC operating agreement

Limited liability companies, known as LLC’s, have operating agreements in place. This document establishes how the company will be run by its owners, their rights and responsibilities, and their percentage of ownership.

If a new partner enters the company, these rules can change a bit. If the business has been run as a single member LLC, this is especially the case. It is important that the operating agreement be amended to reflect any changes in the company when a new partner joins.

If an entrepreneur is currently operating a single member LLC, the operating agreement probably will need a few changes made. It should be established what responsibilities the new member will have, as well as the amount of capital they have invested and their compensation.

It is important that a business owner not only amends their operating agreement, but also checks with the Secretary of State. The office will inform an entrepreneur if their business requires any other administrative changes. For instance, it is possible that a business owner will need to file certain tax forms because the business is no longer a single member LLC and will not be taxed like a sole proprietor. The business owner will also need to list their new member when filing the annual report.

Get an EIN

If an entrepreneur has made their business a sole proprietorship, he or she has made themselves the sole owner of the company. As opposed to other entities, this structure does not offer liability protection to businesses. This means that the business owner is liable for any obligations or debts that affect the company. As a result, they cannot get liability protection to separate professional and personal assets.

It is pretty simple to bring on a business partner as a sole proprietor. It is important that a business owner files for an EIN, known as an employer identification number. This number is a federal tax ID, similar to a social security number, that permits the IRS to catalogue and employers tax account.

You may wonder why the business requires an EIN. Because there are now two partners involved in the business, versus a single owner, there needs to be a business identification number. Previously, one owner might have used their Social Security number on paperwork for the company. That said, when there is a second partner in the business, you will be unable to use your personal Social Security number.

Also, the sole proprietor has to use form 1065, known as the Return of Partnership Income, to report the company’s losses and earnings. It is also necessary to file Individual Schedule K-1s for each partners allotment.

Contact a California Business Lawyer Today

At Nakase Wade, we have helped advise many businesses regarding adding a partner and all that the process entails. Our corporate attorneys and business lawyers can help with everything from contracts, to operating agreements, to general advice regarding running a business and adding a new partner to the team. In addition, we offer free consultations, so get in touch with Nakase Wade today.