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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15042
Experience:  15years with H & R Block. Divisional leader, Instructor
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I have a client who has an S-corp and he is sole shareholder.

This answer was rated:

I have a client who has an S-corp and he is sole shareholder.

Because he wants to add partners with more flexibility; He wants to convert the entity into a LLC partnership. What the the tax effects of doing this? He reports his taxes on a cash basis.

Geno

Robin D :

Hello and thank you for using Just Answer,
First you will need to get a new EIN for the partnership. The S corp was paying a salary before but partners do not receive salaries as they are not considered employees.
Partners are taxed on their net income (gross sales income minus any allowable business expenses).

Robin D :

This net income is then divided among the partners and is taxed on each partner's tax return. Partners who perform services through the partnership are self-employed

Robin D :

S-corporations divide their net income among their shareholders, and the income is taxed on each shareholder's personal tax return at ordinary tax rates.

Customer: Ok I understand the concept between the tax treatment of the two different types of pass through entities; but I guess my question is this: My client is one of several partners that may or may not be an individual. Additionally; some partners will participate less and have varying ownership percentages across profits and losses. One of the intentions of the group is to keep the EIN already in place for billing purposes with insurances and licensures within the medical field.
Robin D :

Generally, businesses need a new EIN when their ownership or structure has changed. If the S corp stayed but new members added that woudl not require a new EIN.

Customer: So is this possible to accomplish? To file a final 2013 S-Corp tax return and start a new partnership as of Jan 1 2014 with the same EIN?
Robin D :

You will be required to obtain a new EIN if you change to a partnership or even to a sole proprietorship.

Customer: Ok this is what I thought as well. Thank you for your advice.
Robin D :

You are most welcome

Robin D :

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