Announcement

Collapse
No announcement yet.

transfer from partnership llc to proprietorship

Collapse
X
Collapse
 
  • Page of 1
  • Filter
  • Time
  • Show
Clear All
new posts
Previous template Next
    #1

    transfer from partnership llc to proprietorship

    Hey, looking for knowledgeable feedback on this. I have a client in a partnership llc and wants to change to proprietorship. I'm thinking tax ramifications. I think the IRC 351 transfers are for personal to corp, so not sure that would apply. I know they will have to end the partnership EIN with the IRS and will not need another unless they hire employees. I will check with the NC SOS on disolvement requirements. I guess if they dissolve in 2016 the partnership will have to file a return even if 0 and they will also have the schedule C.

    Also, if we show the business as the spouse's so that she gets credit for the social security and medicare, and the husband works in the field on a regular basis, that's ok right because income is joint? (I'm in NC)

    I really appreciate any responses, as this is completely new to me!
    Tags: None
    #2
    Does the Partnership have assets that will be distributed to the Partners?

    Is the other current partner the husband?


    If the husband regularly works for the business, he should either be a (1) Partner, (2) Employee, or (3) Independent Contractor. Realistically, I doubt if the IRS would raise an issue if he just silently 'helped' his wife, but from a legal standpoint, I doubt if that is allowed if he regularly works for the business.

    Comment

      #3
      Originally posted by TaxGuyBill View Post
      Does the Partnership have assets that will be distributed to the Partners?

      Is the other current partner the husband?


      If the husband regularly works for the business, he should either be a (1) Partner, (2) Employee, or (3) Independent Contractor. Realistically, I doubt if the IRS would raise an issue if he just silently 'helped' his wife, but from a legal standpoint, I doubt if that is allowed if he regularly works for the business.
      Yes, the other partner is the husband, and yes, they have a few assets. I'm doubting the IRS would raise an issue about the husband either, but legally he wouldn't be an employee right?

      Comment

        #4
        Wouldn't he legally be a partner since they are married and income is joint even though business structure is sole prop.?

        Comment

          #5
          Why do they not want it to be a Partnership? Is it only to give more credit to the Wife? If so, the Partnership could just reallocate the profit percentages to give her a higher percentage. It could remain as an LLC if they want.

          The alternative is a Qualified Joint Venture, which requires 2 Schedule Cs (one for each of them) reporting their respective ownership interest. That way can NOT be an LLC because you are not in a community property state.

          Legally, if the Wife was the only "owner" of the business, the husband would be an employee (or possibly an Independent Contractor). If he has partial "ownership" of the business, he would be a Partner. They could probably set it up either way.

          If they decide to dissolve the LLC/Partnership, I don't think there will be any direct tax consequences (however, I don't do much with Partnerships, so I could be mistaken). They may need to restart depreciation for the assets, but I don't think there would be any other tax issues besides more paperwork for you.

          Comment

            #6
            Originally posted by Super Mom View Post
            Hey, looking for knowledgeable feedback on this. I have a client in a partnership llc and wants to change to proprietorship. I'm thinking tax ramifications. I think the IRC 351 transfers are for personal to corp, so not sure that would apply. I know they will have to end the partnership EIN with the IRS and will not need another unless they hire employees. I will check with the NC SOS on disolvement requirements. I guess if they dissolve in 2016 the partnership will have to file a return even if 0 and they will also have the schedule C.

            Also, if we show the business as the spouse's so that she gets credit for the social security and medicare, and the husband works in the field on a regular basis, that's ok right because income is joint? (I'm in NC)

            I really appreciate any responses, as this is completely new to me!
            Why end the partnership LLC? Its very simple, if she wants more SS/Med earnings... have her take guaranteed payments. Dont lose the Liability protection by dissolving the LLC... after all they did that for some reason right?

            Chris

            Comment

              #7
              They want to dissolve the partnership to make things easier and cheaper. They are not doing a lot of things the way the should, so in a court scenario they would probably loose limited liability status anyway unless they change the way they are conducting business and thy don't want to do that. The wife is a higher percentage owner already, and to get government favor for contracts she needs to be the majority owner, hence my idea of putting her as owner of the proprietorship. It seems weird to me the husband would be a contractor when the income is joint, but that is just a matter of paperwork, their tax situation would be the same.

              My questions are whether or not I need to 1099 the husband, and is their a one time non taxable transfer of assets for this situation?

              Comment

                #8
                no non taxable event

                Assets transferred will have a new basis which will depend on depreciation taken AND liabilities AND cash position. This can get complicated fast and you need to know the rules.

                As a word of caution to allocate earnings different from was is actually happening: Effected is social security and I heard of instances where SS Administration has discovered discrepancies and changed benefits.

                Comment

                  #9
                  The DOL and the DOLs in many states are looking hard at employee vs. IC. If the husband really is not in business for himself, other clients, etc., the wife should put him on payroll. Now you have another layer of paperwork and deadlines, and it sounds like they don't want to add complexity. Lay out all their options and let them choose partnership or sole proprietorship.

                  Comment

                    #10
                    I agree with Lion, if he is not a Partner, he probably would be an employee, which is going to be more expensive and complicated than a Partnership.

                    Comment

                      #11
                      Originally posted by Super Mom View Post
                      They want to dissolve the partnership to make things easier and cheaper. They are not doing a lot of things the way the should, so in a court scenario they would probably loose limited liability status anyway unless they change the way they are conducting business and thy don't want to do that. The wife is a higher percentage owner already, and to get government favor for contracts she needs to be the majority owner, hence my idea of putting her as owner of the proprietorship. It seems weird to me the husband would be a contractor when the income is joint, but that is just a matter of paperwork, their tax situation would be the same.

                      My questions are whether or not I need to 1099 the husband, and is their a one time non taxable transfer of assets for this situation?
                      Easier and Cheaper? So no 1065, but possible payroll for him? They cant stop running personal expenses through the business account?

                      The wife is a higher percentage owner already, and to get government favor for contracts she needs to be the majority owner, hence my idea of putting her as owner of the proprietorship.

                      That entire statement contradicts itself. Unless there is more than 2 partners, she is already the majority owner.

                      I still believe the easiest and cheapest is to keep it as is and just make her a higher percentage owner or just have her take guaranteed payments. You dont have to deal with is the husband is an employee/sub contractor issue and all your other issues are a mute point... except for maybe paying for a 1065.

                      Chris

                      Comment

                        #12
                        Ok, thought I was clear, wife is ALREADY a majority owner, that is not why they want to change to a proprietorship. Payroll is not that difficult, if it must be done. They DEFIINITELY want to change to a partnership to a proprietorship, THAT is NOT in question.

                        My questions are about a one time transfer of assets from a partnership to a proprietorship tax free and if the husband needs to be 1099'd or on payroll if the business is in the wife's name on Schedule C. The income is joint, so I don't really understand why he would be 1099'd or on payroll.

                        Thanks in advance!

                        Comment

                          #13
                          Originally posted by Super Mom View Post
                          Ok, thought I was clear, wife is ALREADY a majority owner, that is not why they want to change to a proprietorship. Payroll is not that difficult, if it must be done. They DEFIINITELY want to change to a partnership to a proprietorship, THAT is NOT in question.

                          My questions are about a one time transfer of assets from a partnership to a proprietorship tax free and if the husband needs to be 1099'd or on payroll if the business is in the wife's name on Schedule C. The income is joint, so I don't really understand why he would be 1099'd or on payroll.

                          Thanks in advance!
                          Think all the reply posters provided good general comments and especially Gretel's "This can get complicated fast and you need to know the rules.". Once you get familiar with those important rules differences you will be able to answer your own question.

                          There is much information that you would be able to find those important differences with some research.
                          Always cite your source for support to defend your opinion

                          Comment

                            #14
                            Originally posted by Super Mom View Post
                            Ok, thought I was clear, wife is ALREADY a majority owner, that is not why they want to change to a proprietorship. Payroll is not that difficult, if it must be done. They DEFIINITELY want to change to a partnership to a proprietorship, THAT is NOT in question.

                            My questions are about a one time transfer of assets from a partnership to a proprietorship tax free and if the husband needs to be 1099'd or on payroll if the business is in the wife's name on Schedule C. The income is joint, so I don't really understand why he would be 1099'd or on payroll.

                            Thanks in advance!

                            As Gretel mentioned, the transfer of asset is tax free, but I think you need to restart the depreciation

                            Although the 'net tax' due would be the same due to a Joint return, most likely the legal classification of the husband would be an employee (if they change it to a Sole Proprietorship with the husband working for it). They don't want the Department of Labor on their backs. They don't want to be breaking laws to avoid paying Unemployment Insurance. Even though the husband works, allocating ALL income to the wife for purposes of increasing her Social Security could also be considered Social Security fraud.


                            What many of us don't understand is WHY they would want to change it to a Sole Proprietorship with an employee. You said "They want to dissolve the partnership to make things easier and cheaper", but payroll is more complicated and expensive than just filing as a Partnership.

                            Comment

                            Previous template Next

                            Disclaimer

                            Collapse

                            This message board allows participants to freely exchange ideas and opinions on areas concerning taxes. The comments posted are the opinions of participants and not that of Tax Materials, Inc. We make no claim as to the accuracy of the information and will not be held liable for any damages caused by using such information. Tax Materials, Inc. reserves the right to delete or modify inappropriate postings.

                            Working...
                            X