I recently had a client contact me with the following situation: a limited liability company (“LLC”) was formed to operate a business and there was a single owner/member of the LLC. In the case of a single member LLC, the IRS (Internal Revenue Service) says that absent a specific election to the contrary a single member LLC is treated as an “ignored entity” for income tax purposes and, accordingly uses the member/owner’s social security number for income tax filing purposes. In other words, it is treated as if it were a sole proprietorship with the income and expenses reported on Schedule C of the member/owner’s federal income tax return (Form 1040).
Although the single member LLC may be an ignored entity for income tax purposes, the IRS directs that the LLC apply for and obtain an employer identification number (“EIN”) if the LLC has employees, pays wages and has an income/employment tax withholding responsibility. So, if the single member LLC conducts a business where it has employees it uses an EIN assigned to the LLC when reporting income/employment tax withholdings but for income tax reporting purposes, it uses the member/owner’s social security number.
What happens if the sole member/owner of the LLC decides to bring in a partner, whether as an investor or as an active participant in the LLC’s business? Since the LLC now has 2 members/owners it is no longer an ignored entity but rather a partnership unless it elects out of partnership status (see IRS Form 8832). As a partnership the income and expense of the business is no longer reported on the single member/owner’s Schedule C but a Form 1065, Partnership Return, which must be filed for income tax purposes. The partnership is required to have a tax identification number. Should the LLC file for a new EIN for income tax reporting purposes or should it use the EIN that was assigned to it for employment tax purposes?
You might expect that somewhere within the IRS publications or instructions dealing with applying for EINs there would be a bright line answer. Unfortunately, that is not the case but a careful reading of the applicable instructions and publications leads to the conclusion that an ignored entity LLC that becomes a LLC taxed as a partnership retains and should continue to use the EIN that was assigned to it for employment tax reporting for fulfilling its new income tax reporting requirements. This is supported by the general proposition that once an entity has an EIN, that EIN remains with the entity until it is dissolved or terminated. The two member LLC will need to file a Form 8832 to reflect the change from ignored entity to partnership status and, on the state and local level, may need to file similar change notices so that filings previously associated with the single member/owner’s social security number are now associated with the LLC taxed as a partnership.