I have a question for you all that has come up within my company. When a disregarded entity, which is typically a single-member LLC for tax purposes, decides to transform into a partnership by adding an additional member through an amendment, is it necessary for the LLC to request a reclassification with the IRS using Form 8832 before filling the new income tax form? And what if an LLC that operates as a partnership loses a member, leaving only one member, does it need to request reclassification as a disregarded entity as it will no longer present a form 1065?
@sjrcpa can i ask a follow up as I run across this from time to time.. when you go from SMLLC on a schedule C to a two person LLC, from a tax standpoint, just use the same EIN on a 1120S? and the other way. two person 1065 LLC to one.. just use the same EIN on the Schedule C? Do you mark the 1065 as final return for the previous year?
If the EIN belongs to the LLC, yes, use the same EIN.
But if the EIN belongs to the Individual Person, the LLC needs an EIN. The disregarded Single Member LLC might not even have an EIN because that is only needed for payroll and excise taxes.
What am I missing here? When a sole proprietorship becomes a partnership, there is a new business and a new filing requirement (Form 1065) and a new EIN required. It's not a change in classification, it's one business being closed and a new one being opened. In your question, how is the single-member LLC being taxed? If it has elected to be taxed as a corporation, then that election would continue.
We are talking about incorporated LLCs here. And the question is by adding or removing members a reclassification would be needed.
For example: An LLC being a disregarded entity will file a 1040 with sched C. However, if we add one more person to the existing LLC, it will become a partnership that would file a 1065. Would a reclassification request be needed in this case? And the same thing the other way around. If a partnership (1065) loses a member, it will then file a 1040 with sched C. Would a reclassification request be needed in this case?
There is no such animal as an incorporated LLC. There are LLC's that have elected for federal tax purposes to be taxed as a corporation. If that is what you are asking about, you may be right that no new EIN is required. However, it looks like a loophole to make it more difficult for IRS to investigate responsible parties for 100% penalty cases. Doesn't it leave the initial member holding the bag?
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