You don’t have to keep the same members in your business, even if you start off as a limited liability company. Your LLC’s members can sell their shares of your business to someone else, continuing the business’s status as a multiple-member LLC, or sell their shares to you, creating a single-member LLC. Though your business will continue to operate normally, you will likely need to change your tax elections and accounting methods.
Limited Liability Company
Like a corporation, an LLC is a formal business entity formed under state law. Though LLCs offer liability protection similar to the protections available from the corporate structure, LLCs require less formality and generally have lower start-up costs. Your LLC begins when you file articles of organization with your state business authority and typically include the business’s name and address as well as the names of all members. You can also create an operating agreement to provide rules for how LLC members relate to each other and operate the business. Operating agreements frequently contain details about how members can sell their membership interest or exit the LLC.
Read More: Characteristics of a Limited Liability Company
Unlike other business structures, LLCs are not recognized tax entities for federal tax purposes. As a result, the IRS requires LLCs to make a tax election at the start of the business. Using Form 8832, you inform the IRS of how you want your LLC to be taxed - as a partnership or corporation. Many LLCs choose taxation as a partnership since this allows the business’s profits and losses to flow through to the members' personal taxes. However, if you choose to be taxed as a corporation, your business’s profits are taxed once at the corporate level and again at the individual level - on your personal income taxes - when you take a distribution from the LLC.
Changing Tax Election
Changing from a multi-member to a single-member LLC may have tax consequences because the LLC is no longer eligible for taxation as a partnership because there are no longer multiple members. However, you can elect to be taxed as a disregarded separate entity, in which the LLC's profits and losses are passed through to you as an individual, or as a corporation. You must file a new tax election form when the LLC’s other members leave, indicating your decision to be taxed individually or as a corporation. Your taxation decision will not affect your liability protection.
Partnership to Sole Proprietorship
The IRS treats your change from a multiple-member LLC to a single-member LLC as the termination of your partnership tax status, so for tax purposes, it is as if you closed a partnership and opened a sole proprietorship. However, your LLC will continue to operate as it always has. The only significant change will be how your LLC pays taxes.
Heather Frances has been writing professionally since 2005. Her work has been published in law reviews, local newspapers and online. Frances holds a Bachelor of Arts in social studies education from the University of Wyoming and a Juris Doctor from Baylor University Law School.