Bit of a complex question around leaving a multi-member (2 person) LLC.

[x46359]

Hey TT community,

I'm currently a member of an early stage multi-memer LLC (it's 2 people including myself) and I'm am looking to leave. Let's call my partner "Person A". Here's some details.

* Person A formed the LLC (originally as a single-member LLC) and filed the certificate of formation with the state in early 2024.

* I joined a few months later. We filed an initial report with the secretary of state listing me and Person A as governors of the LLC + signed an operating agreement (giving me equity in the business). Don't believe an amended certificate of formation was submitted.

* Filed for IRS EIN as multi-member LLC with Person A as the responsible member. 

* Long story short, Person A is moving the biz forward and I'm leaving (basically giving back any existing equity/ownership).

* No revenue, no liabilities, no employees, no nothing to-date.

Here are my q's:

* Given no tax history with IRS + we're in the same filing year (2024) + nothing really happend in the business, are there official forms that need to be filed  (maybe other than removing me as a governor of the LLC with the secretary of state)? I've read more established businesses need to file a mid-year form 1065 but any K-1 I receive would just be zero's across the board.

* If yes, what forms need to be filed and by when to reflect this change back to a single-member (i.e. sole proprietership) LLC? 

Thanks in advance for your inputs!

[tagteam]

Please check back at a later time. I will page Champ @Rick19744 

[Rick19744 · Accepted solution]

Here are a few comments:

• Since the multi-member LLC requested (and I assume received) an EIN, I would recommend filing an initial and final return.  Yes, seems odd to have both in the same year, but not the first time this has occurred.
  • You will need to determine the time period for this return (form 1065).
  • I would file a state equivalent as well to be consistent.
  • Yes, based on your facts, this will be all zeros; assuming no contributions, no purchases of assets, etc.
• The reason I'm suggesting this, is the IRS issued an EIN and somewhere in their system they will be looking for a tax return (and if you file a federal return, states look for their version as well).  Issuing the final return will remove that EIN from their records and you have proof that the LLC has been dissolved, liquidated, etc.  Send these return certified mail return receipt requested.
• Based on the limited facts, I am assuming that no funds have been contributed to the LLC at any point?
  • You note that you "received an equity interest".  This indicates that no cash was contributed on your part.
  • These type of transactions (profits interest vs capital interest) in general can get tricky and complicated.  But given that it appears the business has not really started, should not be an issue.
  • But once again, only limited facts provided.
• You, or someone, should check with the Secretary of State as to what may need to be filed to change the multi-member LLC to a single member LLC (assuming that is the entity structure Person A desires).

[x46359]

Thanks @Rick19744 for the response. 

Additional details/answers if that changes your reply at all. 

• The LLC isn't being dissolved, liquidated. I'm leaving and Person A is moving the business forward (likely as a single-member/sole proprietorship LLC). So, Person A will be filing the annual tax return next year before the filing due date. I imagine this would mean the EIN wouldn't change, only reflect a different (single member) structure. 
  • Is there a difference between an initial and annual tax return?
  • Does this mean we need to file a final return first (reflecting my leaving of the LLC) then Person A would file an annual return (next year) that accounts for the remainder of 2024?
• We are located in different states. Person A in WA and me in CA. Given the LLC was formed/exists in WA + an amended certificate of formation was not submitted when I joined ...
  • is there a need for me to file a CA state return?
  • other than specific document changes with the WA Secretary of State (i.e. removing me as a governor), is a final tax return required? Or can Person A just file an annual return next year?
• No cash contributed in exchange for equity interest. I used some personal dollars to expense software subscriptions as a part of exploration, initial testing, etc. But it's such a small amount I'm not seeking reimbursement for it. Hoping that makes things easier from a tax perspective. 

[Rick19744]

Responses to you follow-up:

• Yes, the multi-member LLC is in fact being dissolved / liquidated. Person A will be filing a completely different return for the single member LLC.
• The EIN was assigned to a multi-member LLC, and as such, will not be used by Person A once the entity becomes a SMLLC.
  • Person A may not need a separate EIN, but there are not sufficient facts to respond to this; and this individual should seek a tax professional for guidance.
• Only one return needs to be filed.  There are boxes on the return to check, and you will check both initial and final return boxes.
  • Based on the facts, you definitely should file an initial and final federal form 1065; one return.
  • The state of Washington has a B&O tax on multi-member LLC's.  Since you indicate that you never notified the state of the change, and since it appears there was no activity, I would not file the B&O return for the "interim" / short-term multi-member LLC.
  • Having said that, I would recommend you contact the state for definitive guidance.
• Since it does not appear that any business activity had started, no CA return necessary based on your facts.

[x46359]

Ah. These answers are super helpful. Thanks again for your quick responses!