GP converted to LLC

[smithkastner]

Husband and wife had a general partnership, owned 50/50. During tax year they converted to an LLC. At the same time, they changed the ownership percentages. Husband material participates and wife does not. Conversion from a GP to an LLC does not require a new tax ID and is not a deemed sale or distribution. Having trouble knowing how to file the 1065(s). During part of the year, wife is a GP and net income is subject to SE tax. During the other part of the year, she’s a limited partner, and net income is not subject to SE. Different check blocks and numbers on the K-1 at different times of the year. The cleanest thing, in my mind, would be to file a final K-1 for the GP and an initial K-1 for the LLC, but I don’t believe you can file two 1065’s for the same TIN in a given year. Any advice?

[Mike9241]

An LLC (limited liability company) cannot legally have partners in the same way that a traditional partnership does. However, an LLC can have members, and some of these members can be considered limited partners. Let me explain further:

1. LLC Members:

   • An LLC is a flexible business structure that combines elements of both partnerships and corporations. Its owners are called members.
   • Members can actively participate in the management of the LLC or take a more passive role.
   • Unlike traditional partnerships, LLC members have limited liability, meaning their personal assets are generally protected from business debts and liabilities.

2. Limited Partners:

   • In a limited partnership (LP), there are two types of partners: general partners and limited partners.
   • General partners actively manage the business and have unlimited liability for its debts.
   • Limited partners invest capital but have limited involvement in management. Their liability is restricted to the amount they invest.

3. LLCs and Limited Partners:

   • While LLCs are not specifically designed as LPs, certain LLCs can structure their membership to resemble limited partnerships.
   • If an LLC does not provide professional services, members who do not actively work for the LLC (similar to limited partners) may avoid paying self-employment tax.
   • Careful drafting of the LLC’s operating agreement is crucial to ensure compliance with regulations.
   • Note that LLCs are more flexible than LPs, allowing members to actively participate in management while still enjoying limited liability.

In summary, while an LLC cannot have traditional “partners,” it can have members who function simila.... If you have specific legal concerns, consulting an attorney is advisable to tailor the LLC structure to your needs.

[smithkastner]

Yes, you are correct. The “owners” in a LLC are called members, thank you. But nonetheless, my question remains? How does one prepare a 1065 (or multiple 1065’s) to account for the fact that this General Partnership converted to an LLC during the tax year? The tax treatment of the members/partners changed mid-year. The husband went from being a general partner to a member-manager. In his case, all net income was subject to SE tax both before and after the conversion. But the wife went from being a general partner to a limited member, which means that she was subject to SE tax during part of the year, but not during the second half.