Can you go from an LLC Partnership back to a sole owner LLC

Question

I have owned a LLC partnership for 6 years in Maryland that owns rental properties and filed tax returns.  If I convert it back to a sole owner pass-through LLC will it spark an audit?

Also, can I set it up so that my S-corp LLC owns the above sole owner LLC.  This way I only have to file one tax return and have to W2 myself through one company?

Logan Allec · Answer

@Steve Podwojski Going from a multi-member LLC to a single-member LLC does not spark an audit in and of itself as long as you treat it for tax purposes within the framework of Revenue Ruling 99-6, which is the IRS' guidance for this very situation.

Are you buying out the other members for cash?  If so, then from your perspective the transaction is treated as though the LLC distributed all of its assets to the members (including you) in liquidation according to the distribution provisions of the operating agreement, and then you purchased from the other members the assets that would have deemed to have been liquidated to them in this hypothetical liquidation scenario.

Of course there are some complexities here (are there any built-in gains? what are you going to do with the assets?), but no, as long as you play by the rules, it will not "spark an audit."

As for your second question, can your LLC taxed as an S corporation own your other LLC?  Sure.  But I'm not sure what it would accomplish and this could in fact lead to a tax trap later on.  Your "other LLC" would not have to file its own tax return either way (whether owned directly by you or through your S corp) because it's disregarded, assuming that this Maryland LLC only invests in Maryland real estate.

Logan Allec · Answer

@Steve Podwojski "so now my LLC partnership will show up on my personal tax return on schedule C or E which I do not want."Why not?  Is it because statistically Schedule C and E are audited more frequently than 1065 and 1120S?

"I would like the S-Corp to own the LLC so that that income will show up as W-2 and K-1 income"

W-2?  Paying payroll taxes on rental income should generally be avoided.

"without having to make that LLC into an S-Corp and have to deal with more paperwork and monthly tax payments."

It will be another tax filing, but from a tax perspective, it would seem to make more sense to just keep your LLC as a husband-wife partnership for federal income tax purposes between you and your wife.  Although you can certainly elect to treat a husband-wife partnership as a disregarded entity, you also have the option to file a partnership return in non-community property states like Maryland so that way the income is reported on your K-1 on Schedule E, Part II rather than Schedule E, Part I if this is important to you.

Steve Podwojski · Answer

My LLC that owns the rental homes was owned by myself, my wife, and a C Corp. (that I owned 100%).   My goal was to clean up some of this paperwork since I had four LLCs. (1 LLC partnership for rentals, 1 S-corp for flips, 1 for SD IRA, 1 C-corp)

I am closing the C Corp. so now my LLC partnership will show up on my personal tax return on schedule C or E which I do not want.

I would like the S-Corp to own the LLC so that that income will show up as W-2 and K-1 income  without having to make that LLC into an S-Corp and have to deal with more paperwork and monthly tax payments.

Drew M. · Answer

Not an accountant, but I believe so.  I think you should consult with a knowledgeable accountant (maybe after April 17, hah) about the best way to achieve your goals.  There may be tax consequences to converting.

Can you go from an LLC Partnership back to a sole owner LLC

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