Tax questions about going from two member LLC to single member LLC?
Tax questions about going from two member LLC to single member LLC?
I am buying out my partner (the other member of our LLC) three months into this year. We have employees so I would like to keep the same EIN - is this ok? Do I prepare form 1065 for the three months and then do Schedule C for nine months? If there is a problem with either of these issues, can I solve it by adding a very minority stake member (say 1%) at the same time the original member exits and just continue business as usual?
Answers:
Steve B: My gut response was that you would need a new EIN, but the Internal Revenue Manual says you can keep the one you have. (See the link below)
I haven't researched the 1065/Sch C issue, but filing both as you have suggested is the only way to properly allocate the income between you and your partner.
2008-04-16 15:06:17
2008-04-16 15:06:17
Chosen Answer
Anon Y: You can keep the same EIN. Your bigger problem is that the partnership will terminate on the day you take over the former partner's interest, resulting in an immediate end to the partnership taxable year and a requirement to file a return within 4 months and 15 days after that. The rule in the tax code is that a partnership will terminate if "within a twelve-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits." If your partner gave 49% to you and 1% to a someone else, the first partnership would terminate and a new one would start. This is because, under the rule quoted above, exactly 50% of the total partnership interests were transferred. (Note that the rule says "50% or more," not "more than 50%.") So your strategy would not solve the problem of partnership termination and the need to file a within a few months afterward. If your current partner retained a 1% interest, however, this would NOT terminate the partnership because only 49% would be transferred. Your partner would have to retain this interest indefinitely, because once that last 1% was transferred to you, the partnership would also terminate under a separate rule.
2008-04-16 15:23:53
Anon Y: You can keep the same EIN. Your bigger problem is that the partnership will terminate on the day you take over the former partner's interest, resulting in an immediate end to the partnership taxable year and a requirement to file a return within 4 months and 15 days after that. The rule in the tax code is that a partnership will terminate if "within a twelve-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits." If your partner gave 49% to you and 1% to a someone else, the first partnership would terminate and a new one would start. This is because, under the rule quoted above, exactly 50% of the total partnership interests were transferred. (Note that the rule says "50% or more," not "more than 50%.") So your strategy would not solve the problem of partnership termination and the need to file a within a few months afterward. If your current partner retained a 1% interest, however, this would NOT terminate the partnership because only 49% would be transferred. Your partner would have to retain this interest indefinitely, because once that last 1% was transferred to you, the partnership would also terminate under a separate rule.
2008-04-16 15:23:53
heart_and_troll: Sounds like you need professional legal (to properly document and implement the transfer) and tax advice - to advise on and prepare the tax returns. I believe you can keep the same EIN. I would not add a 1% owner just to keep an EIN or to keep filing the same kinds of tax returns - there are a lot of implications to adding even a 1% member.
Also, you should perhaps take this opportunity to consider why you are selecting default LLC taxation, which provides roughly no tax benefits, over an S corp. or C. corp., or LLC taxed as an S or C corp. As your legal and tax pros to review these choices.
2008-04-16 15:29:54
2008-04-16 15:29:54