Multi-Member to Single-Member LLC: Final 1065, EIN, Schedule C

Does the partnership end when an LLC goes from multi-member to single-member?

Yes. An LLC taxed as a partnership becomes a disregarded entity the day it is left with one member, unless it had elected to be taxed as a corporation or S corporation. A partnership needs at least two members, so the partnership ends and the one-owner LLC is treated as part of its owner for income tax (Treasury regulation 301.7701-3(b) and (f)(2); section 708(b)(1)). No election form is filed; the change happens by default. The IRS learns of it from the final Form 1065, with the final return box checked and final K-1s, and from Form 8822-B if the responsible party changes.

The tax year splits in two:

An LLC that had elected corporate or S corporation tax is different: a change in the number of members does not change its classification (regulation 301.7701-3(f)(1)). It keeps filing its corporate return.

The case stops being simple when the other member left without a signed buyout, the LLC pays the departing member over time, the exit is mid-year and the capital accounts are unequal, the LLC has debt or unpaid receivables, it runs payroll, a member is not a US citizen or resident, or an S election is in place or planned.

Gather before anyone files:

• The purchase or redemption agreement and its closing date
• Each member's capital account on that date, and the last Form 1065 filed
• The books closed on the exit date: a profit and loss statement and balance sheet for the partnership part of the year, and opening balances for the part after
• The LLC's EIN letter and who is named as its responsible party
• Payroll, state tax and bank account details for the LLC

On what date does the partnership end?

The partnership ends on the day the remaining member acquires the last other interest. The regulations give the example of partners selling their interests to the remaining partner: the partnership terminates on the date of that sale (regulation 1.708-1(b)(1); Revenue Ruling 99-6).

A member who stops working in the business or moves away but keeps their interest is still a member. Until the interest is bought, redeemed or otherwise ended under the operating agreement and state law, the LLC has two members and keeps filing Form 1065.

Two situations push the date later:

• The LLC pays the departing member in installments. A retiring partner receiving section 736 payments from the partnership stays a partner until the entire interest is paid out. In a two-member partnership, the partnership does not end, and its year does not close for either member, until then (regulation 1.736-1(a)(6)). Form 1065 continues each year until the last payment.
• The other member died. A two-member partnership does not end at a member's death if the estate or other successor keeps sharing in profits or losses (regulation 1.708-1(b)(1)(i)).

A sale to the other member ends the partnership on the sale date. The installment rule above covers only payments made by the LLC, not a sale between members, so it does not apply when the buyer pays the price over time (regulation 1.736-1(a)(1)(i)).

What does the final Form 1065 cover, and when is it due?

The final Form 1065 covers a short tax year that ends on the termination date. The Form 1065 instructions say the partnership's tax year ends on the date of termination, and that a short year is entered in the tax year space at the top of Form 1065 and each Schedule K-1.

• Check box G(2), Final return, on page 1 of Form 1065.
• Give both members a K-1 with the Final K-1 box checked (Schedule K-1). How income is split between the two members for the short year is covered in buying out a partner.
• File by the 15th day of the 3rd month after the month the partnership ends, not the usual March 15 for a full calendar year (Form 1065 instructions). Form 7004, filed by that date, extends the filing time by six months.
• If the short year begins and ends in the same calendar year and that year's form is not out yet, the prior year's Form 1065 may be used, showing the actual tax year and any new law (Form 1065 instructions).

Two mistakes to avoid: the remaining owner keeps filing Form 1065 for the whole year, or files nothing for the short year. A late Form 1065 draws a penalty for each member for each month it is late; see late partnership return penalty relief. If your state requires a partnership return, check its instructions for a final return too.

Tax owed for the partnership years stays with the LLC (regulation 301.7701-2(c)(2)(iii)). If the IRS later changes one of those years, it can instead have each member of the final partnership year, including the one who left, take a share of the change into account on their own return (section 6241(7); regulation 301.6241-3).

Did I buy the LLC's assets? How Revenue Ruling 99-6 treats the buyout

If you bought the other member's interest yourself, yes, in part; if the LLC paid them out, this ruling does not apply (see below). Revenue Ruling 99-6 treats a buyout of one member by the other as two steps: the partnership is deemed to distribute all its assets to both members, and the buyer is treated as buying the assets deemed distributed to the seller. The seller reports a sale of a partnership interest.

• The half you bought: your basis in those assets is the price you paid, and your holding period starts the day after the sale.
• The half you already owned: you are treated as receiving it from the LLC as it closes. Your basis in those assets carries over from your basis in your LLC interest, and your holding period includes the time the LLC held them. You may have gain if that deemed payout includes more cash than your basis in your interest.

The ruling assumes the LLC has no debt, no unpaid amounts it earned but has not yet taxed, and no inventory worth much more than its cost. With any of these, the numbers change. The ruling addresses purchases of members' interests, not the LLC paying out a member itself; those payments fall under section 736 (regulation 1.736-1). The seller's tax and the price allocation are covered in buying out a partner, and the journal entries in recording a partner buyout.

Which return do I file for the rest of the year?

From the day after the partnership ends, the one-owner LLC's income goes on its owner's return; the LLC files no income tax return of its own (Publication 3402).

An individual owner whose LLC runs a trade or business is subject to self-employment tax on its net earnings, as a sole proprietor is; rent from real estate is generally excluded (IRS: single member LLCs; section 1402(a)(1)). The LLC is not its owner's employer, so the owner takes profit, not wages (regulation 301.7701-2(c)(2)(iv)(C)).

For an individual, both halves land on the same year's Form 1040: the final K-1 from the short partnership year, and Schedule C (or E or F) for the rest. A partner reports partnership income for the partnership year ending within the partner's year (section 706(a)). For a company as the remaining owner, see an LLC owned by a corporation.

Do I need a new EIN when going from a multi-member LLC to a single-member LLC?

Not for income tax: that moves to the owner's number. For payroll and excise taxes, the regulation says the LLC keeps its EIN, but an IRS web page says a single-member LLC with employment or excise taxes gets a new one, so practice varies. The IRS calls its web pages informal guidance that may not reflect special rules or exceptions and that it does not cite as precedent (IRS: reliance on guidance). The regulation says an entity keeps its EIN when its classification changes, and that a disregarded single-owner entity uses its owner's taxpayer identification number for federal tax purposes unless other guidance says otherwise (regulation 301.6109-1(h)).

The employment and excise rows come from the rule that a disregarded LLC is treated as a separate entity for those taxes (IRS: single member LLCs).

The IRS new EIN page does not name this exact case. It says to get a new EIN if you take over a partnership to operate as a sole proprietor, or own a single-member LLC and have to file employment or excise taxes. It also says no new EIN is needed to report income tax as a branch or division of another entity with no employees or excise tax. With no employees and no excise tax, then, the question does not arise for federal returns after the final Form 1065. With payroll or excise tax, settle it before the first such return after the change. For W-9 and EIN basics of a one-owner LLC, see an EIN for a single-member LLC.

Can the LLC stay a partnership or become an S corporation?

The LLC cannot stay a partnership with one owner. A one-owner LLC can be disregarded (the default) or elect to be taxed as a corporation on Form 8832, or as an S corporation on Form 2553 (regulation 301.7701-3(a); Publication 3402). Form 8832 can take effect up to 75 days before it is filed (regulation 301.7701-3(c)(1)(iii)); Form 2553 is due within 2 months and 15 days after the start of the tax year it is to take effect (Form 2553 instructions).

If an election takes effect at the same moment as the membership change, the election's deemed transactions replace the ones the membership change would cause (regulation 301.7701-3(f)(2)). A Form 8832 election effective on or near the exit date can need the departing member's signature too, so plan it before they leave (regulation 301.7701-3(c)(2)(ii) and (iii)). If the LLC changed its tax classification by election in the last 60 months, it generally cannot elect again yet; losing a member does not restart that clock (regulation 301.7701-3(c)(1)(iv) and (f)(3)). Timing and eligibility are covered in S corporation from day one and changing your business structure. To check what the IRS has on record, see how the IRS classifies your LLC.

What changes for the W-9, bank, state and payroll accounts?

Most changes follow from one fact: for income tax, the business now belongs to its owner.

• W-9: give payers a new Form W-9 with the owner's name on line 1, the LLC's name on line 2, the owner's tax classification, and the owner's taxpayer identification number (Form W-9).
• Responsible party: if the departing member was the EIN's responsible party, file Form 8822-B within 60 days of the change (IRS: About Form 8822-B).
• Payroll: the LLC stays the employer, filing under its own name and EIN (IRS: single member LLCs).
• Bank: update ownership and signers on the LLC's accounts as the bank requires.
• State: if your state's records or annual report list members or managers, update them with the state's filing office, and close or update state partnership and tax accounts under that state's rules.
• Operating agreement: replace the two-member agreement with one that reflects a single owner.

What if the member who left was my spouse?

The starting point may differ. In a community property state, spouses who own an LLC as community property can treat it either as a disregarded entity or as a partnership, and a change in that reporting position is treated as a conversion (Revenue Procedure 2002-69). If you had been reporting it as a disregarded entity, there was no partnership to end. See spouse and family LLCs for the community property rules.

A transfer of the interest from one spouse to the other, or to a former spouse incident to a divorce, generally produces no gain or loss, and the spouse who receives it takes the transferor's basis, not the price paid (section 1041). So the purchase-price basis described above does not apply as written. This rule does not apply if the spouse receiving the interest is a nonresident alien. How that carryover basis fits the asset treatment above is a judgment call; get business tax help.

Example

Illustrative figures in US dollars, for a calendar-year LLC with no debt, receivables or inventory.

One member buys the other's half on June 30

Members A and B each own half. A buys B's entire interest for US$80,000 on June 30.

• The LLC files a final Form 1065 for January 1 to June 30, box G(2) checked, with final K-1s to A and B. It is due September 15.
• July 1 to December 31 goes on A's Schedule C.
• A's basis in the half of the assets bought from B starts at US$80,000, with a holding period beginning July 1. A's own half keeps the partnership's holding period.

The same LLC has two employees

Income tax moves to A's Form 1040 from July 1. The LLC keeps filing its quarterly payroll returns and issues year-end wage statements under its own name and EIN. A takes profit as the owner, not wages.

The LLC pays out the departing member

Members C and D each own half. The LLC pays D US$60,000 cash on September 30 for D's whole interest. C is the only member left, so the partnership ends September 30 and the final Form 1065 covers January 1 to September 30, due December 15.

If instead the agreement has the LLC pay D US$20,000 a year for three years, starting in the exit year:

• Year 1: the partnership continues; Form 1065 for the full year, K-1s to C and D.
• Year 2: the same.
• Year 3: the last payment ends the partnership; a final Form 1065 runs to that date, and C reports the rest of the year on Schedule C.

Different for you?

• The seller's tax on the price, or each member's share of the short year: see buying out a partner.
• A mid-year exit with unequal capital accounts, LLC debt, or installment payments: the final Form 1065 and the buyer's basis involve judgment calls; get business tax help.
• The LLC runs payroll, or the EIN question must be settled before the next payroll return: get business tax help.
• The LLC has an S election, or you want one now: see S corporation from day one and get business tax help.
• The other member walked away without selling or signing anything: whether and when their interest ended depends on the operating agreement and state law; get business tax help.
• You are not a US citizen or resident: a one-owner LLC wholly owned by a foreign person files a pro forma Form 1120 with Form 5472 for any year it has reportable dealings with its owner or other related parties (Instructions for Form 5472); see foreign-owned single-member LLC filing and get cross-border tax help.
• The member who left is not a US citizen or resident: the buyer of their interest, or the LLC if it paid them out, may have to withhold 10% of the amount realized, which includes the departing member's share of LLC debt, and is liable for any amount it fails to withhold (section 1446(f); section 1461; Form 8288 instructions); see foreign partners withholding and get cross-border tax help.
• The final Form 1065 was never filed or is late, or an IRS notice arrives about a partnership year: see late partnership return penalty relief, and get business tax help to file it or answer the notice.
• The books need the buyout entries: see recording a partner buyout.
• The books run straight through the exit date, or are behind: the final Form 1065 and the owner's return each need their own part of the year; get bookkeeping help.
• Another member joins later: see adding a member to your LLC.
• You want to convert to a corporation instead: see changing your business structure.
• The other member was your spouse: see spouse and family LLCs.