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Thomas McJD
Thomas McJD, Attorney
Category: Business Law
Satisfied Customers: 6515
Experience:  Experienced in Corps, LLCs, Partnership, etc.
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We have a Texas 2 member (father and son) LLC taxed as a partnership

Customer Question

We have a Texas 2 member (father and son) LLC taxed as a partnership by default. Father retired in July 2012 and has no involvement in LLC as of then. Son would rather not dissolve LLC since all creditors, debtors and bank accounts are setup under that EIN for that LLC. What are our options to keeping the business name? We are currently still doing business under that LLC.
Submitted: 1 year ago.
Category: Business Law
Expert:  Thomas McJD replied 1 year ago.

TMcJD :

Hi, I will be happy to assist you, and it is my goal to make you a very satisfied customer! This may take a few minutes, so thanks for your patience.

TMcJD :

You can keep you EIN, you'll just need to file an IRS Form 8832 to let the IRS know that you're now a single-member LLC. You can elect to be treated as a sole-proprietorship or corporation. If you elect corporate taxation treatment, you can elect s-corporation treatment via Form 2553.

TMcJD :

Make sure to update your operating agreement to reflect that it is a single member LLC with provisions concerning the new tax treatment (sole proprietorship or corporate treatment, not partnership treatment).

TMcJD :

There may or may not be tax consequences associated with your father transferring his membership interest in the LLC to you. You need to review the following revenue ruling to make that determination. You might have to sit down with a local CPA to fully explore potential tax issues.

Customer :

Do we still have to file paperwork with Texas Secretary of State for this?

TMcJD :

http://www.irs.gov/pub/irs-drop/rr-99-6.pdf

TMcJD :

Yes, you'll probably need to amend your articles of formation (if you listed your father as a manager of a manager-managed LLC or as a member of a member-managed LLC).

TMcJD :

But that depends on whether he was listed as an agent, member or manager in your formation paperwork.

Customer :

nor father nor son are listed as managers. I, son's wife, am listed as operating manager of LLC

TMcJD :

Okay, then nothing would need to be updated with the secretary of state:

TMcJD :

Members of LLCs may assign the member’s ownership interest in accordance with the LLC’s governing statute (Texas Business Organizations Code, Chapter 101, Subchapter C) and its governing documents, such as its regulations, operating agreement or company agreement. There is no filing requirement with the secretary of state when there is an ownership change. If the registered agent or office information has changed after a change in ownership, you must update that information. See Form 401 (Word 103kb, PDF 94kb).

TMcJD :

http://www.sos.state.tx.us/corp/amendmentsfaqs.shtml

Customer :

i have read that if one of the members of a 2 member LLC "steps out" (as in the father no longer being involved with the LLC) this automatically dissolves the LLC....

TMcJD :

No, that is not correct.

TMcJD :

It's just no longer taxed as a partnership (which is why you've got to inform the IRS).

Customer :

i was also told that if he sells his ownership interest, say to me, (so he no longer has any affiliation with the LLC) it is still considered as a termination of the LLC...

TMcJD :

No, not correct either. A member can sell his interest. If he sold to you so that there are still two members, then it's still taxed as a partnership.

Customer :

Now, what you're telling me is confusing me, because I've read so much information and explained this scenario to alot of tax professionals who have confirmed the fact that if the father "steps out", LLC terminates. If what you are saying is the accurate, then how do i go about removing him from the LLC?

Customer :

You are a CPA?

Customer :

ON the 1065, His ownership would change and then inform IRS by filing 8832 (with or w/o tax return?) and what other steps should I take to completely disassociate the father from the LLC without it affecting the LLC doing business as is?

TMcJD :

Well CPAs don't know the law. They pretend they do. It doesn't terminate the LLC. It terminates how it is taxed, which is why you inform the IRS, as previously noted. I'm not a CPA - I'm a tax and business law attorney.

TMcJD :

To change ownership, you have to document it in the LLC paperwork as previously explained -- by amending the operating agreement and making any other recording of the change of ownership. These are internal documents.

TMcJD :

You don't do it through the IRS, state office, etc. It's purely internal

TMcJD :

It's pretty simple to get him out. He just signed as assignment of LLC membership (a form you could find on google). Then you update the operating agreement, as noted. Talk to your CPA about s-corporation or sole proprietorship election and then file 8832 or 2553

TMcJD :

Of course if you take your father-in-law's shares, it's still considered a partnership an nothing will change tax wise

Customer :

Thank you for that. Well, in that case, for tax year 2012, father was still involved up to July. His ownership dropped then. We are still filing 1065 with father's information as a member with the ownership interest corresponding to for 2012 him up to July. For next year, we would just need to change the ownership information on the 1065 if we decide to keep it as a partnership (if i bought out his ownership interest)? If we decide to become a single member LLC, do we need to file the 2012 as the final return?

TMcJD :

Yes, the 1065 would just list the new partner.

Customer :

what do you mean "take father-in-law's shares"?

TMcJD :

Yes, the 2012 1065 would be the final partnership return

TMcJD :

His membership interest, not shares

Customer :

2012 1065 would be the final partnership return even though we are still doing business as that LLC? Of course, father not involved at this point

TMcJD :

Yep, b/c it's not taxed as a partnership anymore if there's only one member. But if you become the other member, it won't be the final 1065

TMcJD :

It doesn't matter if he's actively involved. As long as he owns a membership interest, he's a partner.

Customer :

If I don't take his ownership interest and we keep it as a single-member LLC, all we have to do is file 8832 or 2553 (what's the difference?) to let IRS know taxation will be changing and do the internal agreements for LLC?

TMcJD :

You can find those forms online to review them, but as previously noted, the 8832 is for sole-proprietor or corporation (c corporation) election. 2553 is for s-corporation election

TMcJD :

Someone has to take his member interest. Until it transfers to your husband or you, your father-in-law is still a partner

Customer :

oh i see. In that case, we would be leaning towards the 8332. Now, do we file that with our 1065 final return or do we file after or before we file our 1065 2012 return?

TMcJD :

No, it's a separate form and you just file it separately.

Customer :

My husband will be taking his ownership interest. So, that would let us file 8832, correct?

TMcJD :

You won't file it until you've done the paperwork to transfer his shares to your husband. If they go to you, there's no reason to file

Customer :

when do i file it? before or after i've filed my 2012 1065 final return?

TMcJD :

yes 8832 if your husband takes the interest and wants sole-proprietor tax treatement

TMcJD :

I don't recall off the top of my head, you'll need to look at the 8832 instruction re time for filing

Customer :

and this should allow us to keep our current Employer Identification Number? permitting us to keep our current bank account opened under the LLC?

TMcJD :

Yes

Customer :

Wow, that sounds so easy. I even googled this information and alot of tax professionals who answered similar questions always answered that LLC would terminated upon one of the members "stepping out". Even a book called "The TaxBook" says so.

Customer :

will i be able to print this conversation so I can refer back to it?

TMcJD :

No, no LLC termination -- just how it's taxed. The tax treatment is terminated. That's a whole separate ballgame from the LLC's legal existence.

Customer :

Okay, so to recap:

TMcJD :

I'll switch to Q&A and you should be able to easily copy and paste the conversation. I would be grateful if you would leave me a positive rating. Thanks.

Customer :

Wait,

Customer :

I just want to recap

Customer :

to make sure I understood

Customer :

because I have a friend with the same situation and I want to make sure I understood correctly

Customer :

If a member of a 2 member texas LLc wants out, he has to sell or transfer his ownership interest to someone and this does not terminate the current LLC or affect the current Employer Identification Number, right? Or - that member wanting to opt out of LLC can do so by LLC filing form 8832 or 2553 with IRS to let them know of taxation changes and do the necessary paperwork for their operating agreement but nothing needs to be filed with the secretary of state?

Customer :

What are the forms I need to file "internally" with the LLC to describe the change? Is there a downloadable form I can go by to make the addenum to the operating agreement? or does this form have a specific name to it?

TMcJD :

Yes, except the 8832 (or 2553 if applicable) does not change the ownership -- it just lets the IRS know of a change in ownership and the LLC to then elect appropriate tax treatment.

TMcJD :

As noted previously, change the operating agreement and have father-in-law sign as "assignment of LLC member interest" form

TMcJD :

You can find them on google 99% of the time

Customer :

okay, so the "internal" paperwork changes the ownership? what type of document needs to written up and added to the operating agreement? what does it need to state?

TMcJD :

You need a whole new operating agreement most likely, but there's no way for me to answer your question without reviewing your paperwork. That's why it's generally recommended that a local attorney assist you with that

Customer :

awesome! thanks you've been very helpful...Now, will the father be a limited partner for tax year 2012?

Customer :

or is he still liable for SE Tax on the distributive share of income for the time he had ownership interest in the LLC?

TMcJD :

No, just a regular partner for the whole year whether he participated or not

Customer :

so domestic partner and is liable for SE on distributive share of income from LLC?

TMcJD :

Yes

Customer :

ok. thank you so much...Would you please turn on the feature as to where I can print this conversation?

Customer :

oh, nevermind i was able to copy conversation and paste it.

TMcJD :

Please don't forget to leave me a positive rating. Thanks!

Thomas McJD, Attorney
Category: Business Law
Satisfied Customers: 6515
Experience: Experienced in Corps, LLCs, Partnership, etc.
Thomas McJD and 4 other Business Law Specialists are ready to help you
Expert:  Thomas McJD replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Customer: replied 1 year ago.


Thanks for your help the other day! I wanted to ask you on Form 8832, it doesnt show any option for being taxed as a single-member LLC. Is this just for LLCs who want to be taxed as S-Corps or Corps? On the 1065 LLC return, it will marked as a technical termination and final return, correct?

Expert:  Thomas McJD replied 1 year ago.
Part 1 is b (change in classification -- from 2 to 1 member). Part 2a is "no" there was no prior election (you just took default classification). Part 3 is "no". Then just fill out part 4. Part 6 is c.
Customer: replied 1 year ago.

Articles of Organization reads as follows:


Article 3: Management: The limited liability company is to be managed by managers. The names and addresses of the initial mangers are set forth below: (Only 1 Manager/Member is Listed in AofOrg)


Individual: Clarissa Torres


Manager/ Member #1


The Operating Agreement pretty much general. It doesnt name specific names of who will be Officers, Managers, etc. Just describes duties and so on. But the Minutes of First Meeting of Members of LLC states that (My husband) "was elected temporary Chairman and (his father) was elected temporary Secretary, each to serve only until the close of the meeting."


Continues:


"The Chairman called for the nomination and election of company officers. Upon nominations duly made and seconded, the following were elected and qualified:


Operating Manager: Clarissa Torres


Secretary: (blank)


Treasurer: (blank)


THe Resolution Written Consent of Director of LLC states the following:


"Resolved, that the membership interest of the company be issued to the named individuals in the amount stated in exchange for cash, property, services performed, or other assets received as indicated:


Name of Member: (My husband)


Amount: (blank)


Interest in Company: 50%


 


Name of Member: Hector Torres


Amount: (blank)


Interest in Company: 50%


 


My question: What additional LLC paperwork do we need to prepare? I have customized company forms for LLC, all I have to do is fill out appropriate ones I'm needing. Which will I need to prepare? A minute meeting (example: minutes of special meeting of Members)? Resignation of Officer? Resolution of the members? Help.


Also, who needs to sign 8832? Operating Manager? or My husband?

Expert:  Thomas McJD replied 1 year ago.
Without reviewing the full operating agreement ("OA") I can't say anything for certain. But if the OA doesn't mention anything about partnership taxation, capital accounts, or other tax matters, then you won't need to change anything about the OA as a result of going from partnership taxation to sole-proprietorship taxation (the default for a single member -- referred to as "disregarded entity" on the Form 8832).

Since you're listed as the manager and will continue to serve as the manager, then nothing with regard to management will need to change in the OA, and there is no need to have any document referring to LLC action in that regard.

The OA will also not need to be updated with regard to membership if it doesn't list individual members within the OA.

There will need to be a document referring to action of the members that records the transfer of member interest from your father-in-law to your husband and indicates that your husband is now the sole member of the LLC. Plus, as noted previously, you'll need your father-in-law to sign a separate "Assignment of Limited Liability Company Member Interest." You can find that document or something title very similarly (with the same function) on the internet for free (or for a more trusted form you would pay a small fee). In fact, I will provide a form below, but I would appreciate an additional positive rating from you for my additional answers and the form. Thanks!

Since officers were only elected for the one meeting and none thereafter, then you won't need anything with regard to election or chance of officers UNLESS the OA requires that officers be appointed and none ever were. You noted that there is no such requirement, just a description of what the officer would do if elected. As such, such an LLC document is probably unnecessary.

The document referenced the change of membership would just be a special meeting or an action by consent in lieu of meeting.

It doesn't matter who signs the 8832 -- it can be either the manager or the member.

The 1065 would be the final return and technical termination of the partnership. However, before you check that box, read the instructions to the form and make sure there's nothing else that needs to be included or a separate box checked for some odd reason.

Assignment of Limited Liability Company Interest

I, (Assigning party’s name), hereby transfer and assign all right, title and interest presently owned in that certain limited liability company known as (FULL NAME OF LLC), an [state of formation] limited liability company, to:

(name of part to whom assigned)

This assignment is in accordance with Section of the Operating Agreement for (Name of LLC).

All parties to this assignment represent that the operating agreement allows this assignment, without penalty or other adverse consequence. If such representation proves to be untrue, and any party to this assignment provides adequate evidence of such, this assignment shall be void.

(assigning party’s NAME)

Thomas McJD, Attorney
Category: Business Law
Satisfied Customers: 6515
Experience: Experienced in Corps, LLCs, Partnership, etc.
Thomas McJD and 4 other Business Law Specialists are ready to help you
Customer: replied 1 year ago.


The document that references the change of membership, would the following satisfy the requirement?


 


Title: Minutes of special Meeting of Members of (Name of LLC)


 


A special meeting of the members of (Name of LLC), a Texas limited liability compnay, was held on the 15th day of December 2012, at 10:00am at (Our home office),


 


The meeting was called to order by Clarissa Torres, the Operating Manager of the Company, and also kept the records of the meeting.


The Operating Manger (document reads "the Secretary" but since none was named in OA then okay to change to Operating Manager?) reported that members representing majority interest in the Company were present in person, the aggregate amount representing 100% percent of the membership entitled to vote.


The Operating Manager (again document refers to "the Secretary") reported that the following members were present in person:


Name:(My husband)


Interest: 50%


 


Name: (Father)


Interest: 50%


 


The Operating Manager (document refers to "the Chairman") announced that there were present in person and that the meeting was legally convened and ready to proceed.


On motion duly made and seconded, and after due deliberation, the following resolution was voted upon:


RESOLVED, that (document has blank for me to fill in and along the lines of the following is what I should include here?) Father is transferring his membership interest to My husband and as such, My husband is now the sole member of the LLC and be taxed as a disregarded entity...something along that line? what would be the legal wording for that? Is this all we need to included under the "Resolved" part to the document.


 


(Document continues:)


A vote was taken which showed:


In Favor of Motion


My husband, representing 50% interest


Father, representing 50% interest


 


The Operating Manager (docuemnt refers to "the Secretary") reported taht 100% interest had been voted in favor of the foregoing resolution and 0% intrest had been voted against the resolution, said vote representing a quorum (what's this mean?) of the membership entitled to vote thereon.


The OM (docuemnt refers to "the Chairman") therupon declared taht the resolution ahd been duly adopted. (Should we included somewhere here as of what date it will be adopted? In other words, when the sole membership for my husband will become effective, for example, starting tax year 2013 January?)


(Document continues:)


There being no further business, upon motion duly made, seconded and carried the meeting was adjourned.


 


Dated this ___day of _______, 2012.


 


__________________


Document has signature line for "Secretary", this would be changed to have OM sign, right?


 


ATTEST:


_________________


Member


 


_________________


Member

Expert:  Thomas McJD replied 1 year ago.
I would be happy to assist you again, but I've spent a significant amount of time already. If you would please provide a positive rating for my prior answer, I would be happy to review your new question and provide an answer. I would not expect another positive rating for the answer to your newest question. Thanks so much for understanding.
Expert:  Thomas McJD replied 1 year ago.
Thank you. Give me just a bit, and I'll review your information and additional question and get you an answer. Thanks!
Expert:  Thomas McJD replied 1 year ago.
document reads "the Secretary" but since none was named in OA then okay to change to Operating Manager?

Yes, that's fine to just reference the Manager.

RESOLVED, that (document has blank for me to fill in and along the lines of the following is what I should include here?) Father is transferring his membership interest to My husband and as such, My husband is now the sole member of the LLC and be taxed as a disregarded entity...something along that line? what would be the legal wording for that? Is this all we need to included under the "Resolved" part to the document.

I really like this document, but only in addition to a separate assignment document (like the one I provided at the end of my prior answer).

That assignment would be executed first.

Then, the above language could be changed to something like, "RESOLVED that the [title of assignment document], attached hereto as Exhibit "A" and made a part hereof, which transfers all of [father-in-law's name]'s membership interest in [llc name] to [husband's name] is hereby noticed, ratified, and approved. [Husband's name] is now the sole owner of [name of llc], which shall give the appropriate notice to the Internal Revenue Service that the LLC is now a single-member LLC and elects to be treated as a disregarded entity for tax purposes.



Re your question about a quorum. A quorum is the minimum number needed to pass a measure. Usually it means 50% of the voting interest.

Otherwise, the document is sufficient to show that the membership has changed. You can reference a date that the assignment shall be recognized as of and be effective from January 1 but the assignment itself would also need to reference Jan 1 as the effective date of the assignment.
Customer: replied 1 year ago.


Does it matter which date we had meeting and what date we reference on documentation?


Will this date affect our "technical termination" for tax purposes? (For example, if we reference documentation that we had meeting on Dec 31, 2012 or January 1, 2013, does it affect our 1065 since we are filing until Dec 31, 2012 taxed as a partnership, and requesting to be taxed as a sole proprietor until jan 1st 2103.)


 


On that same note, when should we file form 8832? with 1065 return? after 1065 return is filed? Instructions don't specify when to file, but it does say something about it can not be more than 75 days prior to filing...help??

Expert:  Thomas McJD replied 1 year ago.

The meeting really isn't what matters -- the assignment document is what matters. Legally, a transfer will not be deemed to have taken place prior to the assignment document being signed.

but the meeting could be after that fact at any time really and it would simply recognize the transfer and ratify it. but that would not have prevented the transfer from being effective from the date of the actual assignment.

8832 is a separate form, as previously noted. Let me review the instructions.

Expert:  Thomas McJD replied 1 year ago.
The 75 days sets when you should file. If you want it to be effective from Jan 1, then you can't normally file later than 75 days after Jan. 1. You may qualify for late election relieve, however (as discussed in the instructions) so that you could still be a disregarded entity for tax purposes for all of 2013 despite any late filing of the 8832.
Customer: replied 1 year ago.

omg!!! so i'm running late on form 8832, huh?! 75 days would actually be tommorrow and it being a weekend would probably, not count?


i don't understand the late electioin relieve, though...do we qualify under any? there are several that seem to fit us but not sure...

Expert:  Thomas McJD replied 1 year ago.
Yes it would have to be today or a late filing. Based on my cursory review of the instructions and the facts you've presented, you probably qualify for the late election, but I can't say that definitely.
Customer: replied 1 year ago.

What is the tax rules regarding ponzi schemes? I got involved in a multi-level marketing company which compound your invested money but company got shut down by Securities and exchanges commission before I could "cash out". What can I do with this for tax purposes? Can I take the invested money as a loss? I would have no income from this company/business venture.

Expert:  Thomas McJD replied 1 year ago.
I'm really not sure to be honest. The best thing would probably be posting a new question and listing it in the "tax" experts category. Sorry I couldn't be a help on that issue.
Customer: replied 1 year ago.


NO problem. Thanks.

Expert:  Thomas McJD replied 1 year ago.
You're welcome. Have a great day!

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