single member LLC

[mollyanna58]

A friend of mine asked me a question about taxes, and I hope someone on this board can help.

He and a friend had started a business that was organized as an LLC with 2 members. The business did not take off and is now inactive but not dissolved. The friend resigned as a member in 2011 so it is now listed with the state as a single member LLC.

The LLC has not been dissolved because he would like to start up the business again at some point in the future.

Until now, he has completed federal and state partnership returns, with form K-1s given to the 2 members. The past couple of years there has been zero income and the only expense is the annual state filing fee.

Since there is now only one member of the LLC, can this simply be included on his personal 1040s? If so, would it be under schedule C?

Thanks in advance for your help.

[mwcpa]

For 2011 your friend needs to file a "final" partnership return through the date his/her partner resigned and issue a final K-1 to him/herself and the partner.
The a "new" tax identification numbers needs to be obtained for the "new" single member LLC
Activity after the partner left will be on the schedule C of the new sole owner, provided they do not elect to be taxed otherwise.

[rangerj]

Added note: Any expenses incurred in the inactive period, that is while the business is not "an active trade or business", should be capitalized rather than deducted. Said expenses generally would be added to your capital account, but depending upon what the nature of the expenses are they may be organization expenses or "start up" expenses. Again, the deduction would not begin until the business becomes "active".

[cpadvisor]

Feb 24, 2012 18:18:26 GMT -5 mwcpa said:

For 2011 your friend needs to file a "final" partnership return through the date his/her partner resigned and issue a final K-1 to him/herself and the partner.
The a "new" tax identification numbers needs to be obtained for the "new" single member LLC
Activity after the partner left will be on the schedule C of the new sole owner, provided they do not elect to be taxed otherwise.

Would it really need a new EIN? The entity is continuing, but only has one member. There isn't a new LLC, right?

[mwcpa]

advisor...

from IRS publication 334

"New EIN. You may need to get a new EIN if either the form or the ownership of your business changes. For more information, see Publication 1635, Understanding Your EIN. "

from IRS publication 1635 (http://www.irs.gov/pub/irs-pdf/p1635.pdf).... assuming the entity is taxed as a partnership....

"You will need a new EIN if any of the following are true: ...One partner takes over and operates as a sole proprietorship..."

[cpadvisor]

I can understand that if it was a "Partnership" ... the "Partnership" entity would no longer exist if there was only one partner.... but the entity is an LLC... taxed as a Partnership... and after the 2nd member left the LLC ... it would be a single-member LLC... which by default is taxed as a sole-proprietorship....

That is why I asked...

[rangerj]

Unfortunately Congress has not yet addressed these new fangled business entities, that is the LLP and LLC. Yes, the LLC can go on with one member as an LLC assuming the state in which it is organized allows for that. However, the IRS "system" thinks that it is a partnership, and it is, for federal tax purposes. Ergo the rules as cited above. Someday Congress will address these new entities and we can all breath a sigh of relief, er NOT SO MUCH. All stated tongue in cheek and very cheeky. It is tax season. ;D

[cpadvisor]

Mar 7, 2012 9:49:46 GMT -5 rangerj said:

Unfortunately Congress has not yet addressed these new fangled business entities, that is the LLP and LLC. Yes, the LLC can go on with one member as an LLC assuming the state in which it is organized allows for that. However, the IRS "system" thinks that it is a partnership, and it is, for federal tax purposes. Ergo the rules as cited above. Someday Congress will address these new entities and we can all breath a sigh of relief, er NOT SO MUCH. All stated tongue in cheek and very cheeky. It is tax season. ;D

Once again, I understand those issues. But, if you file a "Final" partnership return that *should* satify the IRS system. The K-1's would reflect one member having a "final" K-1 and the other being the only remaining member.

When the 100% owner reports their single-member LLC on their 1040, all should be right in the world... sure there is possibility where the IRS sends out an automated correspondence notice for some issue, but if the all the above is true and reported - a simple letter explaining the situation should make any troubles go away...

I just think the new EIN is the wrong answer in the case where the partnership is an LLC...

[mwcpa]

From experience....

I have a client who, before I met them, operate their LLC as a partnership..... they supposedly filed a final return when it become a single member LLC..... 4 years later a notice arrives.... "where is the partnership tax filings for the id number being used?" paraphrasing....

one may not agree with the way the IRS master file operates, but getting a new tax id takes all of 45 seconds.... while answering correspondence 4-5 year later when the files are in cold storage and no one remembers the details takes hours.... I stick with spending 45 second now....

Congress in true form, as we have gotten used to, of doing nothing has left the IRS with it's hands tied... they have done a pretty good job though trying to come up with a fair way to address the LLC (hybrid) type of structure.

[cpadvisor]

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