How do I change from a form 1065 partnership to a single member llc that would be reported on a schedule C?

Forum|Forum|7 years ago
June 1, 2019
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Best answer by DanielV01

You need to prepare a Final Partnership return. This final return should show that one partner is liquidating his/her/it's assets in the partnership and turning the business over to the single member. You will still need to fulfill your state's requirements for maintaining the LLC (any tax or registration fees that are imposed for the LLC designation), and you do well to advise the IRS of the change of entity (from a partnership to a disregarded entity Sole Proprietorship) associated with the LLC's EIN. If you do these things, next year the single member may file the business as a disregarded entity sole proprietorship using Schedule C.

DanielV01Answer

Level 15

You need to prepare a Final Partnership return. This final return should show that one partner is liquidating his/her/it's assets in the partnership and turning the business over to the single member. You will still need to fulfill your state's requirements for maintaining the LLC (any tax or registration fees that are imposed for the LLC designation), and you do well to advise the IRS of the change of entity (from a partnership to a disregarded entity Sole Proprietorship) associated with the LLC's EIN. If you do these things, next year the single member may file the business as a disregarded entity sole proprietorship using Schedule C.

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S

sandphill

Level 2

My husband and I have a 50% 50% partnership LLC.

I would like to retire and wonder if I can stay on the partnership and change it to a 100% to 0 or 99% to 1%.

Do I have to file a Final Partnership return.

AmyC

Level 15

@sandphill

You and your husband have a partnership. You either file a partnership return now or you file two schedule C forms.

If you are filing a partnership return, you will have to adjust the numbers for ownership. If you are filing 2 schedule C's each year, you could just quit filing yours.

While you know if you are filing a partnership return or 2 schedule C's, not everybody may realize that the option for 2 schedule C's is limited by where you live. If you live in a community property state, you qualify for the 2 Schedule C's.

If you are not in a community property state, you are filing a partnership return, definitely.

@Rick19744 thanks for catching that this would be confusing to new folks without the edit.

[Edited 04/10/20 | 5:15pm PST]

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Carl

Level 11

If you filed a 1065 Partnership Return in 2018, then you have to file a "final" 1065 Partnership return for 2019. Period.

In order to close the partnership without selling it, the partnership must show the disposition of all assets and the distribution of any cash. If the partner's are married and filing a joint 1040 personal tax return, then both partners of the partnership can simple show that all assets were removed from the business for personal use and all funds were withdrawn by the partners. If the partnership was started with any capital contributions (cash or assets) make sure to indicate those contributions were returned to the contributing partner, so there's no tax implications. This is referred to as a "return of capital contribution".

If the partnership has inventory, then it should be "removed for personal use" by/to the person that will continue the business as a single member LLC.

Several things have to be true for the partnership to be considered closed/disolved by the IRS (and your state).

1) All assets owned by the partnership must be disposed of somehow. In your case, it would probably be disposed of by either showing it as a "return of a capital asset" to the partner that contributed it, or as compensation to one of the partners, or as removed for personal use by one of the partners.

2) All cash balances must be zero, and all outstanding monetary transactions need to be settled. (I said "settled", not necessarily paid off. There's a difference.)

3) If the partnership carries inventory, then the End of Year Inventory Balance *MUST* *BE* *ZERO*. The easiest way to accomplish this is by showing that inventory as" removed for personal use" or as compensation to one of the partners.

Once the "finaL" 1065 is completed, filed and accepted by the IRS and all "final" K-1's are issued to all partners, then and only then are you ready to start your personal joint 1040 tax return.

For the SCH C, the start date of the business will be the "ORIGINAL" start date of the partnership - doesn't matter if it was years or decades ago either. If any assets will be transferred to the SCH C business then the "in service" date for those assets is the "ORIGINAL" in service date from the partnership -doesn't matter if it was years ago either. This is the "ONLY" way to properly and correctly account for and report prior year's depreciation already taken on those assets, when they were in the partnership.

If the single member LLC will have inventory from the partnership, then understand that for the SCH C business the beginning of year inventory balance *MUST* *BE* *ZERO*. This is not something that's up for discussion really, because there are no exceptions to this. That's just the "way it works" in the COGS section, and it's right too. But if inventory is involved I'll be happy to help you understand it when you get to that point in the SCH C section of the program. It can be difficult to wrap your head around it. But once you "get it" a great big light bulb illuminates over your head and it all makes sense.