Going from Multimember LLC to Single-Member LLC

By Jeffry Olson, J.D.

Going from Multimember LLC to Single-Member LLC

By Jeffry Olson, J.D.

A limited liability company (LLC) is a formal business entity with a flexible structure. In general, LLCs allow for the flow-through taxation of a sole proprietorship or partnership, while providing the limited liability protection of a corporation. The owners of an LLC are known as members. At the time of formation, an LLC can have multiple members or a single member. After formation, an LLC with multiple members can become a single-member LLC.

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Formation of the LLC

Members form an LLC by filing articles of organization with the Secretary of State or other business authority in the appropriate jurisdiction. The amount of information required in the articles of organization is minimal, including the name and address of the LLC and the names of the members of the LLC. Members may include additional information in the articles of organization if they choose.

Often, LLCs decide to provide more detailed information on the operation of the LLC in a document called the operating agreement. One advantage to using an operating agreement instead of providing additional details in the articles of organization is that members may amend the operating agreement without filing with the state.

Operating agreements include a wide variety of details for managing the business. These details can include how members sell their membership interest or how they exit the LLC.

Why a Multiple-Member LLC Might Go to a Single-Member LLC

A multiple-member LLC goes to a single-member LLC for a number of reasons. One member may want to retire. The parties may no longer get along. One of the members might die. A member may need to move for family reasons. Divorce may require a member to cash in his or her interest in the LLC. The number of reasons for a change in the ownership structure of an LLC is limited only to the number of imaginable changes in life circumstances.

When members first form the LLC, it is unimaginable that anything would cause such a drastic change in the ownership. The members still get along, making this the perfect time to agree on any future transfer of ownership interests. It is a simple thing to include in the operating agreement and it may never come up. But if it does, all parties will be glad to have already dealt with the issue.

Tax Consequences

Multiple-member LLCs are taxed as partnerships, so the income of the LLC is not taxed at the LLC level. Instead, the income is taxed as partnership income at the individual level.

Single-member LLCs are taxed as sole proprietorships. Again, the income of the LLC is not taxed at the LLC level but as sole proprietorship income. That means the member pays taxes, usually including self-employment taxes, at the individual level.

When a multiple-member LLC goes to a single-member LLC, it is no longer taxed as a partnership. Rather, it is taxed as a sole proprietorship.

Practically, little changes in terms of taxes with this type of membership change. The change is primarily in the name of the taxed income from partnership income to sole proprietorship income and their associated tax forms.

How to Go from a Multiple-Member LLC to a Single-Member LLC

The only things that are officially required for a multiple-member LLC to become a single-member LLC are the sale of the membership interest of the leaving member(s) to the remaining member and the filing of a new tax election form. Some states require updating the articles of organization, and it is also helpful to update the operating agreement.

The biggest difficulty is often how the members handle the sale. Ideally, they have anticipated this issue and detailed it in the LLC's operating agreement. Always consult a tax expert, but the tax consequences should be minimal. If the parties are willing to cooperate and continue to maximize the value of the LLC, the LLC can continue and function successfully.

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