Adding a new partner to your business can be exciting, but it also comes along with many different tax, financial, and legal changes. It’s important to know what you’re getting into and work with your accounting partners at MKS&H to understand and prepare for the differences between now and when you have a new business partner.
Adding a New Partner to a Single-Member or Multi-Member LLC
If you are adding a new partner and currently have a single member LLC, your LLC will now be considered a partnership in the eyes of the IRS. You do not need to file any special paperwork for this to occur, as federal tax rules will automatically make the change. If you have an LLC with multiple members that is taxed the same as a partnership, you will retain partnership status and need to eventually update your K-1s so that the new partners receive one as well.
Adding a New Member to an LLC Taxed as an S-Corp
If you have an LLC that is taxed as an S corporation, adding a new member or owner is not considered a taxable event. However, it is critical to prepare ahead of time to make sure that adding a new partner will not remove your S corporation delegation. As corporations can only have 100 owners, and every owner must be a resident of the United States for tax purposes. Make sure that you plan ahead with help from your tax professionals to avoid any issues.
How Should You Adjust?
Adding a new partner does not typically have immediate tax consequences, but it can make things complicated in the long run. Always track your basis, as your basis in your interest may fluctuate. Tracking this basis allows you to know exactly how much gain or loss there is on the sale of your interest, how you are being taxed on your partnership distributions, and how many partnership losses you can deduct. Meticulous recordkeeping is always important for taxes, but it becomes even more critical when adding a new partner to your business.
Master the Tax Filing Process with Help from MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to make taxes easily and avoid the most common mistakes. Contact us today for a consultation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.