How Do I Change My Multi-Member LLC to a Single-Member LLC?
Members or owners can form an LLC by filing articles of organization with the Secretary of State or other business authority. While members can choose to include more, only minimal information is required in the articles of organization such as the name of the LLC, the names of the members, the name and address of the registered agent, and whether the LLC will be member or manager managed.
Often times members of LLCs decide to include additional detailed information regarding how the business will operate in their operating agreement. The information should include how members can sell their membership interest and how they can exit the LLC. The advantage of including this information in the operating agreement rather than the articles of organization is that any amendments the members make do not need to be filed with the state. Therefore, the operating agreement remains a private document.
When would I want to change my multi-member LLC to a single-member?
There are several circumstances in which a multi-member LLC would transition to a single-member LLC. For example, members may reach retirement age, the parties may no longer agree as to how the business should be run, a member is getting a divorce and wants to cash in their interest in the LLC, or any other number of life changes. It is important to include terms in the operating agreement that state how a member can exit or transfer their ownership interests at the outset before any life changes or disagreements, however unforeseeable, occur.
What are the tax consequences?
Changing your multi-member LLC to a single-member LLC can have serious tax consequences. Multi-member LLCs are taxed as partnerships, so the LLC income is taxed at the individual level rather than at the LLC level. Single-member LLCs are taxed as sole proprietorships meaning the member pays taxes at the individual level which usually includes self-employment taxes. Therefore, when a multi-member LLC transitions to a single-member LLC, it will be taxed as a sole proprietorship, not a partnership.
How do I go about making the change to a single-member LLC?
First, the leaving members will need to sell their membership interests to the remaining member. The remaining member will then need to file a new tax election form once it’s been determined if the LLC will be taxed as a corporation or an individual. Some states also require the articles of organization to be updated with the Secretary of State or other business authority. You will also want to update your operating agreement to more accurately reflect how the single-member LLC will operate. Your LLC be able to operate normally; the only major change will be how the IRS will treat the LLC in terms of taxes. Additionally, you won’t need an Employer Identification Number (EIN) as only multi-member LLCs need EINs.
While it may be a rather straightforward process to change your multi-member LLC to a single-member LLC, there are also many ways that something can go wrong. A reliable business or asset protection attorney can help guide you through this process.