Many new business owners opt to form single member limited liability companies as opposed to operating as a sole proprietor. This is typically done to protect their personal assets from business-related liabilities. When a single member limited liability company is formed, the owner is referred to as the single member of the company.
As the company grows, the member/owner may decide to offer others an ownership interest in the company. Once that decision has been made, steps must be taken to convert the business entity from a single member limited liability company to a multiple member limited liability company. This usually involves both federal (Internal Revenue Service) and state notification.
When you register a company as a single member limited liability company with the Internal Revenue Service (“IRS”), you are accepting pass-through tax status. Pass through tax status is when the business income or losses pass through to the tax return(s) of the individual owner(s). This status can apply to sole proprietors, partnerships, limited liability companies and S-corporations.
So, should you decide to convert a single member limited liability company to a multiple member limited liability company, the IRS must be informed of this conversion as the pass-through tax status will be affected. Notification is done with the use of Form 8832. This form provides notification of the change of a business entity’s method of taxation. Upon filing this form, the business entity will remain a pass-through entity. However, the pass-through taxation status will now apply to all members/owners.
In additional to notification to the IRS, some states also require an amendment and submission of amended organizational documents. For additional information, please contact the Anderson Adderly Group at 845-470-2027.