2-member LLB becomes 1-member

[Janitor Bob]

2 clients were 80/20 members in a partnership...I did the business return for 2014 and 2015...splitting off K-1s to each of their returns.  In 2016 partners have a "falling out" and officially file papers to have 20% member removed...she joins military and I have not heard from her....I assume I'm not doing her taxes this year.  The 80% partner (now 100%) wants to forget the whole partnership thing and just file taxes this years as if he was a 1-member LLC for all of 2016...forgo the 1065 and just do Sch C...taking all of the profits on his return.  Am I correct in that we should still file a Final 1065 for 2016?  I have no way of splitting his income/deductions...he just gave me lump sums for income/expenses for the year.  Could I file a final K-1 with zero income and zero expenses then file actual expenses through remaining client's Sch C?  Forgive me...I'm out of my area of expertise here.

[Terry D EA]

When during 2016 did the partnership terminate? There must be two members to be a partnership. The remaining partner (now 100% owner) cannot just throw in the towel and do as you say. The partnership must windup business and be terminated. Were there any assets left in the partnership?  If so, were they distributed to the partner's according to their percentage? Are there any remaining receivables? What are the papers that were filed to have the 20% member removed? Was this a buy out transaction? If you can establish a termination date and show all remaining assets have been distributed to the partners, then the remaining 100% can be a LLC taxed as a disregarded entity. You will still have to complete a 1065. There are a lot of questions that need to be answered to give you a good definitive response. Check out the link below to see if anything can help

https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-tax-implications-partnership-terminations.pdf

[Janitor Bob]

Thanks...There were two members, then they filed paperwork with an attorney to terminate the 20% partners involvement effective in May 2016....There were no assets or receivables...it is just a cash sale business....he buys things and then re-sells them for profit on e-bay.

[grandmabee]

I would say the partnership ended in May of 2016 by your facts listed.  BUT 1065 still needs to be filed with income & expenses before the closing.

 

[Janitor Bob]

It would have been nice if they had informed me of this in May

[jklcpa]

What does the agreement say?  Is there any leeway that would allow a special allocation of the income and expenses during that period for the K-1?  The LLC definitely files a final return through that date in May. 

 

[Janitor Bob]

The agreement drawn up by the attorney basically states that the 20% partner withdrawals from the partnership effective 05/18/16 and releases the business from any and all obligations commitments, assets, and liabilities for 2016

[Janitor Bob]

could I file the final 1065 for period ending 05/18/16 and allocate 100% of income and expenses to the remaining partner.  I know this is what both people want, but not sure if i can change the 80/20 to 100/0 for 2016.  There are no assets, so if I change to 100/0 then the member who withdrew will not have a late K-1 necessitating an amended return on her part...all income would just go to the remaining member on his K-1.

[jasdlm]

If that is not spelled out in the operating agreement, I wouldn't do it without having them issue a corporate resolution dictating the same (and you keep a signed copy for your file).

[Terry D EA]

9 hours ago, Janitor Bob said:

The agreement drawn up by the attorney basically states that the 20% partner withdrawals from the partnership effective 05/18/16 and releases the business from any and all obligations commitments, assets, and liabilities for 2016

The wording indicates the partnership ended 5/18/2016. The 1065 needs to be completed with each partner getting their respective share of the income and expenses from Jan thru May assuming they are a calendar year tax payer and not a fiscal year.. You also list the K-1 to the 20% partner and the 80% partner as their final k-1. From the time of the partnership ended thru the remaining year, the 100% gets everything on Sch C as a disregarded entity. I agree with jasdim, I wouldn't do it the other way unless there was a corporate resolution or if it was spelled out in the original operating agreement.

 

Edited April 4, 2017 by Terry D
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