Key Takeaways:

  • Converting a multi-member LLC to a single-member LLC involves a transfer of ownership, updated operating agreements, and IRS tax treatment changes.
  • The IRS considers this a termination of the partnership for tax purposes, requiring a new tax election and potentially a new EIN.
  • State laws govern LLC conversions, and some states may require additional filings.
  • Updating business agreements, contracts, and licenses is critical to ensure a smooth transition.
  • Proper documentation and tax planning help minimize legal and financial complications.
  • If needed, consulting a business attorney can clarify legal requirements and streamline the process.

What happens when a partnership becomes a single-member LLC?

A partnership becomes single member LLC when the members of the LLC sell their shares to one remaining member. The business is then able to continue operations with no changes, but the remaining owner is required to change tax elections and the method of accounting used. It isn't a requirement, though, to keep the same set of members in the business, and this is true even if the original business format was a limited liability company.

IRS Treatment of the Tax Status Change

The LLC gets to keep operating normally after switching to single-member ownership, but the tax payment requirements change quite a bit. From the perspective of the IRS, changing from an LLC with more than one member to a single-member LLC is considered the end of the partnership tax status. This is comparable to closing a partnership and reopening as a sole proprietorship as far as taxes are involved. The IRS doesn't consider an LLC an entity for federal tax purposes the way it does other business structures.

State-Specific Compliance for LLC Conversions

When transitioning from a multi-member LLC to a single-member LLC, state laws determine the filing requirements. Some states may require:

  • Articles of Amendment to update the ownership structure.
  • Dissolution of the previous LLC and formation of a new single-member LLC in states that don’t allow direct conversions.
  • Publication requirements, where applicable, to notify the public of the structural change.

It’s essential to check your state's Secretary of State office to ensure compliance.

LLCs Are Business Entities Under State Law

While not taxed at the federal level as an entity, state laws do recognize LLCs as formal business entities. The liability protection from an LLC is similar to the protection provided by the corporate business format, with the advantage of lower costs to start the business. Filing articles of organization that note your business name, address, and member's names with your state's business authority begins your LLC. An operating agreement that explains the process to let members leave the LLC can also be created.

Tax Election for LLCs

At the time of starting business operations, LLCs are required to choose a tax election. The form to tell the IRS to tax your LLC as a partnership or a corporation is Form 8832. Partnership is one of the more popular forms of taxation for LLCs because it lets the profits and losses from the business pass through to the personal taxes of the members. Choosing to tax an LLC as a corporation means business profits are taxed twice, once at the corporate level and then, when taking a distribution from the LLC, on the member's personal taxes.

Employer Identification Number (EIN)

The EIN is used for identifying the business entity. When one of the partners takes over and runs it as a sole proprietorship you will need to obtain a new EIN (see EIN confirmation letter). Because you are buying or inheriting an existing company. 

Banking, Contracts, and Licenses

Updating your EIN may not be the only step. The change in ownership also impacts:

  • Business bank accounts – Some banks require a new account if the EIN changes.
  • Vendor contracts and leases – Contracts under the previous LLC structure may need renegotiation.
  • Business licenses and permits – Some states require updated filings to reflect the single-member status.

To avoid disruption, notify all relevant institutions in advance of the ownership change.

How Changing From a Partnership LLC to a Single-Member LLC Affects Taxation

It's no longer an option to be taxed as a partnership when transitioning to a single-member LLC since there aren't multiple members at that time. When other LLC members leave the organization, the remaining member is required to file a new tax election form that indicates whether the IRS should tax the LLC as a corporation or if you should be taxed as an individual. The way you choose to be taxed has no effect on the liability protection you receive from the LLC.

Tax Considerations and Potential Liabilities

Once your LLC converts to a single-member LLC:

  • Pass-through taxation applies – The business is now taxed as a disregarded entity by default.
  • Self-employment tax responsibility increases – Former partners may have split tax obligations, but now the sole owner assumes full liability.
  • Potential tax liabilities from asset transfers – If any LLC assets were previously allocated to different partners, they may trigger taxable events upon dissolution of the partnership.

Consult a tax professional to ensure the transition doesn’t trigger unnecessary liabilities.

Key Documents for Converting to a Single-Member LLC

The two documents required to convert to a single-member limited liability company are the same ones required to set up a new one:

  1. The articles of organization - The Secretary of State's office is typically where the articles of organization need to be filed. The articles of organization might be covered by a different name in some states.
  2. The operating agreement outline the responsibilities of each member and is to be kept at your place of business. Plus, the operating agreement isn't required with a high degree of strictness, but it is advised to have on hand.

You can learn more about the differences between articles of organization and operating agreement.

Updating the Operating Agreement

Even as a single-member LLC, having an operating agreement remains crucial to:

  • Define business operations and ownership rules
  • Protect liability status
  • Clarify succession plans and future ownership changes

If you plan to add partners later, keeping a flexible operating agreement can simplify the process.

Transferring a Sole-Proprietorship to a Single-Member LLC

Assets and liabilities from a sole-proprietorship transfer to the LLC after the articles of organization are filed. This typically happens without any extra steps or effort. For example, a sole-proprietorship bank account with funds in it transfers directly to the LLC. Debt transfers the same way, with the bills now owed by the newly formed LLC. One exception is loan debt. To find out how that will be handled, contacting the lender is the only way to determine if that debt will transfer to the new single-member LLC.

Finish Old Business

Make sure the old multi-partner LLC is completely dissolved and wound up before proceeding with the single-member LLC. Make sure:

  • The departing partners get the full share of assets and debts that belong to them.
  • To file a partnership dissolution form with your state's Secretary of State.
  • To release a statement in local news media announcing the termination of the partnership.

FAQ Section

1. Do I need a new EIN when changing to a single-member LLC?

Yes, the IRS requires a new EIN when a partnership dissolves and becomes a single-member LLC.

2. Can I change from a multi-member LLC to a single-member LLC without dissolving the business?

In most states, yes. You may need to amend your operating agreement and update tax election forms, but a full dissolution is not always necessary.

3. What happens to debts and liabilities during the transition?

The new single-member LLC inherits all debts unless restructured or refinanced. Ensure proper legal documentation to protect personal liability.

4. How long does the transition process take?

It varies by state and complexity, but typically, the legal filing process takes a few weeks. However, tax and contract updates may take longer.

5. Do I need an attorney for this process?

While not required, an attorney can help navigate state requirements, draft agreements, and prevent costly mistakes in the transition.

If you need help with a partnership becoming a single member LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.