Form 8832 - Disregarded entity changing to partnership

[! Hulio !]

DH has a single-member LLC. He has an EIN that he obtained when the entity was formed (the original SS-4 naturally listed the business as a "disregarded entity").

He wants to add me as a partner and recently obtained a new EIN because of it, only to get a letter from the IRS saying basically that he does not need the new EIN and should instead file Form 8832 to elect to be taxed as a partnership. Now this struck me as strange, esp. when the IRS web site states that a sole proprietor is required to obtain a new EIN if he "takes in partners and operates as a partnership."

Plus, in reviewing the instructions for Form 8832, the section on default classification describes how a disregarded entity that adds another member "becomes a partnership" for tax purposes. So . . .

Should I take this to mean that a Form 8832 is actually NOT required to be filed then, as the LLC "becomes" a partnership by default? Or does the Form 8832 need to be filed in this case anyway? If the former, should we call the IRS regarding the possibly erroneous letter?

First, I would question if there might be any problem with the state law regarding the status of the LLC. I would expect that there would be no problem with the state but as each state has different laws it should be considered.

Second, off-hand I do not know of any references that actually describe your LLC's change in status, but I would agree that the LLC entity should continue with the same EIN as it is the same entity with the state. All that has happened here is a change in tax status by default. I would simply close the books to determine profit/loss to report on the original owners 1040 Sch-C and thus at year-end report the remainder of the year as a partnership 1065.

Form 8832 is to elect a tax status other than default. I do not see a need to file form 8832 or provide the IRS with any notification or further correspondence. The IRS will know when the partnership 1065 is filed, the same as if you had started a new partnership that was not a continuing LLC.

Good luck with the new relationship.

[! Hulio !]

That makes perfect sense. Thanks!