Q: I’d like to add a member to my Indiana LLC, what do I need to do?
Thank you to a customer from Indiana for that question! The Hoosier State is one of the easier places where you can add a member to an LLC, but that doesn’t mean the process is free of pitfalls. In particular, owners of an LLC need to be aware of tax implications when expanding membership. Here’s what you need to know:
How do I add members to my Indiana LLC?
Under Indiana Code § 23-18-6-1, an LLC can add a member with interest in the company under any terms that were decided in the LLC’s operating agreement. Alternatively, if the operating agreement does not specify whether the LLC can add members or how to do so, a new member may be admitted with the unanimous written consent of the LLC’s current members.
How are distributions and allocations decided for new LLC members?
Much like adding a member in general, the way a new member gets distributions and allocations is normally determined by the LLC’s operating agreement. However, if your operating agreement does not outline that process, Indiana’s default rule is to make distributions and allocations based on the agreed-upon value of each member’s financial contributions in the LLC’s records.
Do I need to file anything to add a member to my LLC in Indiana?
The Indiana Secretary of State’s Business Services Division does not require an LLC to list its members when filing Articles of Organization at formation, or when submitting an annual Indiana Business Entity Report. As a result, you won’t have to file anything to update the Business Services Division when you decide to change your number of members. You can just keep that between your members and your internal documentation.
That said, you may need to let one other group know about your LLC’s change in membership—the Internal Revenue Service.
Will adding an Indiana LLC member affect taxes?
If your company LLC was already a multi-member LLC, adding additional members won’t make much of a difference in your taxes. But if the business was previously a single-member LLC, you’ll need to notify the IRS about the change when you add new members.
By default, a single-member LLC is taxed like a sole proprietorship (a disregarded entity for tax purposes). When expanding to include additional members, the business becomes a multi-member LLC and should be taxed like a partnership, C-Corp or S-Corp—so, to avoid taking a tax hit, notify the IRS about your LLC’s change in status by filing Form 8832.