Informal partnership to LLC

[Margaret CPA in OH]

So in 2006 a family (mother, son and daughter in law) decided to import olive oil from Grandma's groves in Greece and sell it. They sensed it could be a viable business (sold $900 worth in 2007) so formed an LLC in Feb. 2008. No reporting was made in 2007. The oil imported in 2006 was actually mother's private stash which she "contributed" to the p'ship to see if it would sell (son's idea, he just finished his MBA last week).

They came to me early enough to file an extension for 2008 and ONLY NOW are getting the actual data in my hands. So I would like to file for 2007 as well as 2008. They didn't get an EIN until the LLC was formed so is that a different partnership from the group in 2007?

There was no initial capital paid in, each just bought oil, bottles, paid for shipping and travel out of pocket. You know they all had to go to Greece to meet with the supplier and arrange shipments, of course. There is still no separate checking account (they promised to open one) but every expense and sale is documented. It will be a viable business and probably profitable this or surely next year. They already have contracts with some local specialty stores.

The operating agreement is still a work in progress so doesn't address unreimbursed p'ship expenses. I would like to treat those expenses not paid from sale proceeds as unreimbursed although I believe they do want to get paid back. I don't think scores of little loans to the LLC would be correct, though.

Any comments, observations, hints, etc. would be most welcomed! I guess having a well thought out and capitalized business plan just isn't something a lot of folks do, is it? Thanks!

[kcjenkins]

The agreement on UPE can be a verbal one for the partnership, although it should be written into the LLC Op Agreement. Yes, for 2007 they have a partnership. Do a 1065. Transferring those assets to the LLC in 2008 is simple, just roll over the 1065, duplicate it, then change the name on the duplicate to the name of the LLC and go forward with it. Don't forget to mark the 2007 1065 as a final return, and don't bother with the one month in 2008, would be my choice, unless they were very busy in that month.

[Margaret CPA in OH]

Thanks for your usual great information, KC. Thanks especially about the UPE as a verbal agreement. I will pass along the suggestion to include in the written. They have extensive revisions to make with references to dividends and the company owning shares among other things. There is also a major part allowing self dealing. I questioned that and advised reconsideration and careful review with an experienced attorney.

Expenses paid in 2008 up to the state charter date of Feb. 20 are $4345.64 mostly for bottling supplies and sales were $460. They were functioning as the LLC as of January 1. It just took that long for the attorney to file articles and Ohio to process. They had the website in mid-January.

In reading in QF, I see Rev. Ruling 84-52 that seems to fit this scenario, an existing partnership converting to an LLC. It says that the p'ship's tax year doesn't close upon conversion absent a sale, exchange or liquidation of a partner's entire interest. It does say that the new p'ship (LLC) does not need to apply for a new TIN. But the "old" one never had a TIN. Maybe on 2007 I could put "applied for?"

My head hurts and I still have my BBQ restaurant to do. All by Sept. 15 because I leave for a dive trip in Indonesia. My mind is already gone! Gotta pull myself together here and Think!

[jklcpa]

Margaret, you are correct with that reference. An existing partnership that incorporates to an LLC but is still filing as a partnership simply continues to file a 1065 using the same EIN. The entity doesn't file a final return.

It would be a name change only. If you are rolling over from the initial return's file in ATX for the LLC for the second year, be sure to check the name change box on page 1. Also make sure to change the entity type box on page 2 in Schedule B from partnership to LLC.

[Margaret CPA in OH]

Thanks, jklcpa, for the additional comments. The informal p'ship in 2007 didn't have a name but I think it will be the same as the name chosen for organization as LLC in 2008 - minus the LLC at the end. And good reminder about name change and type boxes, too.

I still am uncertain about the TIN issue. Do you think using "applied for" in 2007 and showing the issued TIN for the LLC would be correct?

Thanks again! They are coming over this evening so I hope to have these ducks lined up and get this done.

[jklcpa]

On the TIN, that's what I would do. I realize the ptnship didn't have the number and applied very late, but ultimately that is the number assigned to the entity, no matter what the name. Attach an explanation of the EIN assignment and the name change to the returns.

Have you advised your client about the late filing penalties for 2007. For 1065s due after 12/20/07, it's $90 per month, per partner, for max of 12 mos. That's $3,240. I'm assuming 3 partners, that son and DIL are each a partner with the mom. That's if you have no reasonable cause.

The partnership may also be assessed the failure to furnish information timely (K-1 to each partner) at $50 each. That amount is assuming it wasn't intentional.

[Margaret CPA in OH]

Thanks again. No, they have not been advised of the late filing information. As I mentioned, I received the data on Tuesday and saw income from sales, hence the meeting this evening. At our initial meeting I was assured that there was only some market sort of research in 2007 and some product given away for feedback. We'll see what happens.

I know they won't like the situation and maybe we an appeal penalties because they were truly ignorant. Sigh...we'll see. It's about that well thought out and capitalized business plan, you know?