2 Person Partnership shrinking to 1 person.

[Brian of Colorado]

We have a client that was a 2 person partnership, an LLC, which filed form 1065 for the 2019 tax year.  At the beginning of 2020 one of the partners broke away, but continued to receive money from the company as a subcontractor.  The company issued them (or rather, issued to their new company) a 1099 for all the money they received in 2020.

Does anyone have any advice on how to transition this company from a two person partnership to a sole proprietor (one person owner)? and which form(s) to file?

[Terry53029]

Termination when only one partner remains

The partnership form also ceases to exist if a transfer of partnership interests occurs and only one partner remains. For example, a partnership terminates when a 60% partner acquires the interests of two other partners who each have a 20% interest in the partnership (Regs. Sec. 1.708-1(b)(1)). The partnership is terminated as of the sale date of the partnership interests.

See link: https://www.thetaxadviser.com/issues/2019/oct/partnership-terminations-change-form.html

[TaxGuyBill]

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@Brian of Colorado wrote:

At the beginning of 2020 one of the partners broke away,

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If the Partnership ended in early 2020, the "final" Partnership return needed to be filed a LONG time ago (2.5 months after the Partnership ended), and the late-filing penalty has now grown to over $4800.

Money earned as a single business owner is a Sole Proprietorship on Schedule C.

[Brian of Colorado]

It looks like they have decided to remain partners through the end of this year (2021).

So at the end of this year they need to file a final return for tax year 2021.

Do they have to file any papers with the state (Oklahoma) or the IRS to notify them that the company is switching to a Schedule C?

(Also, just curious: Is there a way, or any advantage, to filing a business return for tax year 2022, with only one owner, who receives the only K1 from the company?)

[qbteachmt · Accepted solution]

This is very confusing: "with only one owner, who receives the only K1 from the company?"

There is no K-1 for operating a sole proprietorship. There is no sole owner of a Partnership. A sole proprietor does not get a K-1 for their own business, because Schedules, such as C, are attachments to Forms, such as 1040. It's not a 1065 or 1120 or 1120S, and there is no K-1 issued from that 1040. And what about the 1099-NEC that was issued to that partner? Is all of the operations performed still considered to be this person's other business activity and not the partnership activity?

This is Sept; it sure seems some of this should have been acted on by now. What all is just now being filed?

[Brian of Colorado]

You're absolutely right!  They should have brought this to me sooner.  They may end up being late.  Not a lot I can do about that.  I'll have to think about if I even want to take this on.

Thank you for your help.