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.

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.

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.

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

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.

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