Author Topic: File form 1065 vs. dissolve partnership  (Read 1203 times)

ejmyrow

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File form 1065 vs. dissolve partnership
« on: August 30, 2021, 04:48:13 PM »
Hello!
We just made an LLC, my husband and I. I believe that the small business Association advised us to make a partnership. Then we got a letter saying we had to file form 1065. We went to H&R Block, which I can’t really recommend, and the tax prep person there told us that we should just dissolve the partnership since we are married. Then we don’t have to file form 1065, that they would charge us $500 to file it whereas we can just have a joint schedule C. Should we dissolve the partnership? Any reason not to? Many thanks!

LightStache

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Re: File form 1065 vs. dissolve partnership
« Reply #1 on: August 30, 2021, 06:25:09 PM »
This is a really complicated issue and I'd encourage you to provide some more details. When did you open up the LLC? What state? Who sent you the letter about filing 1065? What's the revenue and expenditures you have and expect to have?

Generally speaking, a single member (owner) LLC is taxed as a sole proprietor (Sch C). An LLC with multiple owners is taxed as a partnership (1065). There are special "yea buts" for spouses you can read about here: https://www.nolo.com/legal-encyclopedia/taxation-llcs-owned-spouses-community-property-states.html and https://www.thetaxadviser.com/issues/2019/apr/llc-spouses-partnership-joint-venture.html.

My first concern is that even if you dissolve the LLC, it will still have been technically operating for a period of time so the IRS and state tax agencies will still be looking for a return even if it's a zero return, especially if they're the ones that sent you the letter.

Whether or not to dissolve it depends on your goals and the costs. If you and your husband want to be equal co-owners, then you shouldn't dissolve it. But if the extra costs, including tax filing, aren't worth it, then you should consider dissolving it.

It sounds like maybe you didn't know what you were getting into when you created a separate legal entity for business. I've seen this happen to a lot of friends. They create an LLC because they think that's the first step in starting a business. But you can start a business and then incorporate later, once you have enough revenue to support the extra costs of a separate business entity. If that's the case for you, I'd recommend terminating the entity and starting with what matters most, which is making sales.

skuzuker28

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Re: File form 1065 vs. dissolve partnership
« Reply #2 on: August 31, 2021, 06:57:26 PM »
This is a really complicated issue and I'd encourage you to provide some more details. When did you open up the LLC? What state? Who sent you the letter about filing 1065? What's the revenue and expenditures you have and expect to have?

Generally speaking, a single member (owner) LLC is taxed as a sole proprietor (Sch C). An LLC with multiple owners is taxed as a partnership (1065). There are special "yea buts" for spouses you can read about here: https://www.nolo.com/legal-encyclopedia/taxation-llcs-owned-spouses-community-property-states.html and https://www.thetaxadviser.com/issues/2019/apr/llc-spouses-partnership-joint-venture.html.

My first concern is that even if you dissolve the LLC, it will still have been technically operating for a period of time so the IRS and state tax agencies will still be looking for a return even if it's a zero return, especially if they're the ones that sent you the letter.

Whether or not to dissolve it depends on your goals and the costs. If you and your husband want to be equal co-owners, then you shouldn't dissolve it. But if the extra costs, including tax filing, aren't worth it, then you should consider dissolving it.

It sounds like maybe you didn't know what you were getting into when you created a separate legal entity for business. I've seen this happen to a lot of friends. They create an LLC because they think that's the first step in starting a business. But you can start a business and then incorporate later, once you have enough revenue to support the extra costs of a separate business entity. If that's the case for you, I'd recommend terminating the entity and starting with what matters most, which is making sales.
I was going to reply in more detail, but FatFI2025 pretty much covered it.

Regardless of what direction you end up going, you will likely have at least one 1065 to file for this year.

jpdx

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Re: File form 1065 vs. dissolve partnership
« Reply #3 on: September 04, 2021, 12:56:17 AM »
See this from IRS:

https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities

If it turns out you live in a community property state, that's good news. Filing a 1065 partnership tax return is a burden and expense you'd probably rather avoid. In this case, I think you'd need to dissolve your LLC and each file a separate Schedule C following the instructions for a qualified joint venture.

Say you live in a separate property state and want to avoid the 1065 partnership return, you could have one spouse own a sole proprietorship or SMLLC and hire the other spouse as an employee.

ejmyrow

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Re: File form 1065 vs. dissolve partnership
« Reply #4 on: September 24, 2021, 08:07:25 PM »
Dear Mustachian Badasses,
Thank you for your help. I apologize for the delay in response. We have an infant and we just moved.
- We live in Colorado
- letter was from IRS
- my husband has been a sole prop for some years doing 1099 sales work.
- the LLC was mainly created for his/our online natural food company. He hasn’t made any sales yet bc the website isn’t live yet. I have helped with some aspects of the business (administrative stuff like this) but it’s really his baby.
Many thanks,
Emily

ejmyrow

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Re: File form 1065 vs. dissolve partnership
« Reply #5 on: September 24, 2021, 08:12:51 PM »
PS - we live in CO so not a community property state and my hubby is sure we formed the LLC in 2021 but I’ll double check. The accountant seemed to think that if we formed and dissolved in the same year we didn’t need to file the 1065.

ejmyrow

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Re: File form 1065 vs. dissolve partnership
« Reply #6 on: September 24, 2021, 08:16:17 PM »
PPS - confirmed LLC was formed in 2021

LightStache

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Re: File form 1065 vs. dissolve partnership
« Reply #7 on: September 25, 2021, 12:53:10 PM »
Ok sounds like you don't care too much about being a legal shareholder so dissolution sounds like the right choice for you.

The accountant seemed to think that if we formed and dissolved in the same year we didn’t need to file the 1065.

I'm a little surprised by this but I'm not a tax accountant so ¯\_(ツ)_/¯.

skuzuker28

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Re: File form 1065 vs. dissolve partnership
« Reply #8 on: September 28, 2021, 04:36:32 PM »
I am a tax accountant, but not YOUR tax accountant.  I'd err on the safe side and still file a 1065 for 2021, even if there is no activity.  Check the boxes for "Initial Return" and "Final Return".  That way you have sent notice to the IRS and Colorado that yes, there was a partnership, but it was dissolved.

Otherwise I have seen cases where the IRS has sent notices for missing returns based on EIN registrations.  Would they accept your explanation and not assess late filing penalties?  Maybe, but it's pretty easy to avoid that entirely by filing that no-activity return.