Operations
Bringing on a co-founder to your Delaware LLC: structural and tax implications
Adding a co-founder to a single-member LLC changes tax classification and requires Operating Agreement amendment. Here is the process.
Tax classification change
Single-member LLC: disregarded entity, no separate LLC return. Multi-member LLC: partnership by default, Form 1065 plus K-1 to each member.
The change happens automatically on admission of second member; no IRS election needed. CPA fee increases as partnership returns are more complex (~$1,000-$2,500 vs $500-$1,200).
Operating Agreement amendment
Single-member Operating Agreement should be replaced with a multi-member version. Multi-member OA addresses: ownership percentages, profit/loss allocation, distributions, voting, transfer restrictions, deadlock procedures, buy-sell, and dispute resolution.
Multi-member OAs typically warrant a Delaware-licensed attorney ($2,000-$5,000 to draft well).
Vesting for incoming co-founder
Common practice: incoming co-founder's stake vests over 3-4 years with 1-year cliff. Protects original founder if co-founder leaves early. Operating Agreement should specify vesting schedule and consequences of early departure.
83(b) election applies if co-founder is US person; foreign co-founder has different tax considerations.
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