Converting a Multi-Member LLC that files 1065 to one that files on Schedule C

[dbeemoney]

We setup a husband and wife multi-member LLC that files a 1065 every year. We did that for particular reasons, and understand that it would have been easier tax filings as a single member llc reporting on Schedule C.

The reason for the initial setup will wane in about a year. In addition, this LLC produces very little income anymore.  But we have to pay an accountant every year to create the 1065 and K-1s and would like to simplify our tax filings by moving to a schedule C reporting.

I'm unclear how I do this. I assume the multi-member LLC would do some sort of final tax filing, and from then on we can just report on Schedule C.  Thoughts? 

[LeticiaF1]

Yes, you will need to file final Form 1065 and close the partnership.  After you do this you will also get a new EIN for the business, because whoever keeps the business is inheriting an existing company.   You can do that by going directly to the IRS page Apply for an Employer Identification Number (EIN) online.  

[dbeemoney]

Thank you for the input.  I'm unclear why I have to "shut down" the LLC and get a new LLC EIN. All I want to do is change the tax classification. I found this on the IRS website, but I'm not sure how it applies or doesn't to this issue:

Classifications

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

Effective Date of Election

An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification ElectionPDF, to elect how it will be classified for federal tax purposes. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances. See About Form 8832, Entity Classification Election for more information.

[Mike9241]

Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner.

you have a multimember LLC,which files a partnership return and would be required to continue filing a partnership return through the date the number of members is reduced to 1.  That can be done in two ways. first, one member gifts the other member their entire interest in the LLC. This may require filing a gift tax return. Second the LLC redeems the entire interest of one of the members.  Since I don't know what's involved in the LLC talk toy your accountant. 

once it's a single-member LLC it can no longer use the partnership's, EIN. 

the single member entity, for security purpose, if it must issue 1099s or W-2s should get its own EIN for the owner. Otherwise,  their SSN can be used. However, if 1099s or W-2s need to be issued, do you want strangers getting your SSN? Generally, a multimember LLC can not covert to a Qualified Joint Venture.

Consulting with your accountant would be appropriate 

[dbeemoney]

This information is super helpful. Thank you for that. I did talk with an accountant but was uncomfortable with his input, which is why I posted here. I'm not sure he has not provided me accurate advice. Your input sounds much more correct to me given what I can read on the IRS website. However, there is one clarifying question I have and this may be what my accountant is thinking.

The two partners in the multimember LLC are husband and wife. I believe he thinks two Schedule C's could be done, one for the husband and one for the wife.

[PatriciaV]

It depends where you live.

If you live in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, & WI), you may each file Schedule C on your joint return to report your respective shares of the business activity.

However, if you do not live in a community property state, the LLC must file a separate business return (Form 1065 Partnership, available in TurboTax Business), as you have been doing.

For more info, see: LLC owned solely by spouses: A partnership or a joint venture?