Single Member LLC

[Super Mom]

No success on quickly finding it in TTB, I'm thinking a single member (husband & wife) LLC can elect to file a C. Other partner bought out. They can do C now right? Any other returns to be filed, other than with the SOS by the party who bought out the partner, I'm thinking no, right?

[Bill Tubbs]

disregarded entity

No success on quickly finding it in TTB, I'm thinking a single member (husband & wife) LLC can elect to file a C. Other partner bought out. They can do C now right? Any other returns to be filed, other than with the SOS by the party who bought out the partner, I'm thinking no, right?

By default a LLC is a disregarded entity. So, husband/wife could do a Sch C. But, for the time before the buy-out, there may be a 1065 due.

Bill

[BHoffman]

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Do-You-Need-a-New-EIN%3F

See:

"Partnerships

You will be required to obtain a new EIN if any of the following statements are true.
•You incorporate.
•Your partnership is taken over by one of the partners and is operated as a sole proprietorship.
•You end an old partnership and begin a new one."

[Lion]

Don't know about community property states.... A husband/wife joint venture can avoid a partnership return and file on a Schedule C, for instance, UNLESS it is a separate entity at the state level, including an LLC. A two-member LLC will default to a partnership return unless it elects to be taxed as a corporation. A single-member LLC is a disregarded entity. And if 50% or more of the partnership interest changes hands, the partnership ceases to exist; so you may be starting a new partnership anyway.

[Koss]

LLC Tax Treatment

Agree with Lion...

An LLC that has two members is not a single member LLC, even if the members are husband and wife.

If the entity is a partnership, then a husband and wife can choose to file two Schedules C instead of filing a partnership return. This is an election, and certain conditions have to be met.

But if the entity is a limited liability company, with more than one member, then it is treated as a partnership for federal tax purposes, and a partnership return must be filed.

The husband-wife election is only available to a genuine partnership. It is not available to an LLC, even though the LLC is taxed as a partnership.

BMK

[taxea]

I think I disagree. Please correct me...I thought a spousal LLC could use Sch C if they split all income and expenses based on % of service to the business by each party. They have to file two Sch C's for the one business

[Koss]

Qualified Joint Venture

The following text can be found on the IRS website:

- - - -
An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a husband and wife who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company).

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.
- - - -

Here's the link:

http://www.irs.ustreas.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses

BMK

[DaveinTexas]

2 cents more...

The following text can be found on the IRS website:

- - - -
An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a husband and wife who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company).

A business owned and operated by the spouses through a limited liability company does not qualify for the election

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.
- - - -

Here's the link:

http://www.irs.ustreas.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses

BMK

I will just add my 2 cents. The Rev Proc only mentions the entity cannot be treated as a Corporation, an LLC fits the bill if the election to be treated as a Corp is not made. So, an LLC that is wholly owned by a husband and wife in a community property state can be treated as a disregarded entity for tax purposes (ie, Sole Prop).

Non-Community property state QJVs can't use this provision if operated as an LLC. I've had a few inquires from the IRS for two of my LLC clients, both treated their LLCs as one sole prop. I just wrote a letter citing the Rev Proc and no more questions were asked. I agree, though, there is still much confusion on this topic, especially in tax seminars.

For one of my LLC clients, truly one one spouse is active, the other is a full time W2 worker. The other client hires her spouse as an employee so they can take advantage of the HRA plan (Health Reimbursement Arrangement).

[TAX4US]

Ok I am now confused. TP started business and state said he needed to be an llc.(don't know why) On his application for EIN number it is a sole priopter. Wife does not participate in business. Does not have a corp charter or even registered as a Corp. Have not yet seen appl. at state yet. If wife is there for name only and doesn't participate Can this still be put on a Schedule C?

[DaveinTexas]

In a community property state

Ok I am now confused. TP started business and state said he needed to be an llc.(don't know why) On his application for EIN number it is a sole priopter. Wife does not participate in business. Does not have a corp charter or even registered as a Corp. Have not yet seen appl. at state yet. If wife is there for name only and doesn't participate Can this still be put on a Schedule C?

Then yes. If not a community property state, then the LLC becomes a partnership when more than one member exists, unless they choose S or C Corp election. To simplify their situation, I would keep the spouse off of the LLC especially if she will not participate.

[taxea]

[QUOTE=TAX4US;150060]Ok I am now confused. TP started business and state said he needed to be an llc.(don't know why) On his application for EIN number it is a sole priopter. Wife does not participate in business. Does not have a corp charter or even registered as a Corp. Have not yet seen appl. at state yet. If wife is there for name only and doesn't participate Can this still be put on a Schedule C?[/QUOTE

Is she an investor rather than a partner?

[Koss]

Business Entity

TAX4US wrote:

Ok I am now confused. TP started business and state said he needed to be an llc.(don't know why) On his application for EIN number it is a sole priopter. Wife does not participate in business. Does not have a corp charter or even registered as a Corp. Have not yet seen appl. at state yet. If wife is there for name only and doesn't participate Can this still be put on a Schedule C?

The EIN application was filled out incorrectly. It should have been identified as an LLC. A single member LLC is treated as a sole prop for tax purposes; a multi-member LLC is treated as a partnership. But the EIN application should still begin by property identifying the entity, as it is defined by state law. An LLC can even choose to be treated as a C corp or an S corp, in most cases. However, if that election is made, you don't apply for an EIN by identifying it as a corporation. It is always an LLC. When you complete an EIN application and identify it as a single member LLC, the IRS will assign an EIN and classify it as a sole prop. But it is still an LLC.

The error on the EIN application can probably be corrected--without having to get a new EIN--by simply sending a letter to the IRS.

He doesn't have a "corp charter," and is not "registered as a corp" because it is not a corporation. An LLC is not a corporation. It is not a partnership. It is not a sole proprietorship. Under state law, it is an LLC. The client should have some paperwork from the state showing that he formed an LLC.

That paperwork may or may not identify the members. Some states require this while others do not.

If the paperwork filed with the state does not identify the members, then the client can simply decide that he is the sole member. If the paperwork identifies him and his wife as members, then the LLC filing could be amended to remove the wife as a member.

Just because the wife's name appears somewhere in the papers filed with the state does not necessarily mean that she is identified as a member. You have to read the papers carefully. These things are best left to attorneys. Here in Ohio, an attorney acting on behalf of an LLC can file the papers necessary to form the LLC, and the papers may not identify any of the members at all. The papers merely identify a person who is authorized to act as an agent for the LLC--and that person is sometimes the attorney.

Even if the wife is not a member of the LLC, your client can still authorize her to sign checks for the LLC bank account if he is not available. He can delegate additional authority to her by making her an officer or manager. But then she might need to get paid as an employee.

taxea wrote:

Is she an investor rather than a partner?

An LLC does not have investors or partners. An LLC only has members. A person can become a member of an LLC without contributing any capital. A member may or may not be actively involved in operating the business. These things do not change the fact that the person is a member.

An LLC member is similar to a partner or shareholder in the sense that they are in fact one of the owners of the business--regardless of whether they contributed capital.

BMK

[cpahispano]

Operating Agreement

LLC requires an operating agreement (see State Law), the operating agreement documents membership and investments among other things, if operating agreement has two members, then 1065 is required.

[Koss]

LLC requires an operating agreement (see State Law)

Which state?

Most states do not require a written operating agreement. An operating agreement may be an oral agreement. In some cases, the terms of the agreement can be inferred from the behavior of the parties.

Most states have a statute which addresses certain things like ownership, voting and distribution if there is no operating agreement, or if the operating agreement does not adequately address these issues. So the state law has certain default mechanisms that come into play when there is no operating agreement. But it is incorrect to say that state law requires a written operating agreement. This is simply not the case in most states.

Furthermore, if there is only one member, it may be impossible to have an agreement. An agreement requires two parties. For a single member LLC, some lawyers will prepare a document called an operating declaration. But it is not always necessary.

In most cases, the failure to have a written operating agreement or a written operating declaration does not mean that the LLC was not properly formed, and it does not mean that the LLC has broken the law. It doesn't even mean there is no operating agreement. It may well be an oral agreement between the members.

the operating agreement documents membership and investments among other things, if operating agreement has two members, then 1065 is required.

This is certainly true. A properly prepared agreement will identify the members, ownership shares, and capital contributions. I always tell clients that they should have a written operating agreement if there is more than one member. In fact, I strongly recommend that the operating agreement be drawn up and executed before any papers are filed with the state to form the LLC. But clients don't always heed this advice. The simple reality is that many multi-member LLCs come into existence, and begin doing business, without a written operating agreement.

When there is no written agreement, the terms of the agreement can be determined from oral testimony about the oral agreement, notes made by the members, the paper and electronic trail of things like capital contributions and distributions, and the behavior of the parties.

It is absolutely true that a partnership return is required for a multi-member LLC, regardless of whether there is a written operating agreement or not.

The partnership return itself can also become evidence of the terms of an oral operating agreement.

BMK

[TAX4US]

It looks to me like tP has created an animal he may not have wanted as I was not involved in the setup. He claims he owns everything and wife is not part of this picture. I will have to do futher research as I get closer to April 15. Tp's can and often listen to their buddies without proper consideration as to what is about to happen. I will watch this thread for futher comments. Thanks to all.