The Internal Revenue Service (IRS) does not recognize the limited liability company (LLC) as a business entity type under the tax code. LLC members must make a tax election with the IRS to indicate how it should be treated for federal tax purposes. The options available are dependent upon the number of owners, known as members, that are involved. A single-member LLC can choose to be taxed as a sole proprietorship or a corporation. A multi-member LLC can choose to be taxed as a partnership or a corporation. An LLC can change this election at any time by re-filing the election form. The federal election controls how the LLC is treated in its home state, like New Jersey, for state tax purposes.
File Form 8832, "Entity Classification Election," with the IRS. This election form allows an LLC to change its tax election among the various options. The two-page form can be downloaded from the IRS website. The form asks whether the LLC is operating under the original election it made when it applied for an employer identification number (EIN) and how many members the LLC has. Single-member LLCs can then select to be taxed as either a sole proprietorship or corporation. The form must be signed by an authorized party and submitted to the IRS according to the included instructions.
File Form Reg-C-L, "Request for Change of Registration Information," with the New Jersey Division of Revenue. This form will let New Jersey tax authorities know that you have changed the LLC's entity classification with the IRS and will now be filing different tax returns. You can download the form from the New Jersey Division of Revenue website, or fill out the form online. Fill out section E, "Changes in Ownership or Corporate Officers" only, listing the old and new ownership structures.
Amend the LLC's certificate of formation, if necessary. If the retiring LLC member is listed anywhere on the company's formation document, particularly if he was listed as the company's registered agent, you should amend the filing. This can be done on New Jersey Form REG-C-EA, "Business Entity Amendment Filing," in the same way as the change to the company's tax registration. Download the form from the website or fill out the form in the online system.
File the LLC's final partnership tax returns. There is a box labeled "final return" on the top of the first page of both the state and federal tax forms for partnership returns. Check both boxes and file state and federal returns for the part of the year that the LLC existed as a partnership.
File future tax returns of the single-member LLC as a sole proprietor or as a corporation, depending upon the IRS election you made. The effective date of the change from an LLC partnership to a single-member entity will be indicated on the IRS confirmation letter you received in response to your election filing. Use schedule C of the individual 1040 federal tax return if you elected to be taxed as a sole proprietorship. Or file form 1120 for a corporation election.
Although it is relatively easy to file a form and change an LLC tax election, the actual tax implications of the change are a different matter. For accounting purposes, the IRS treats a change from a multi-member to a single-member LLC as a dissolution and liquidation of the partnership. Then, the surviving member purchases the other member's interest in the assets distributed in the liquidation. See IRS Revenue Ruling 99-6 and consult with an accountant regarding how this transaction should be recorded on tax returns.