I have Married Filing Jointly clients who I am doing their 2024 and 2025 tax return. They run a small restaurant. They took over running the restaurant 1/1/24 from a cousin. The cousin established the business as a single member llc 10 years ago and is not materially involved in the business any longer. the problem is that the cousin is still the registered member of the llc. my clients just want to submit the tax returns as sole proprietors and leave the cousin out of it. What are the risks of doing this? i know they need to have the cousin dissolve himself as the member ASAP.
Family small business structure tax issue
byu/Otherwise_Break9921 intax
Posted by Otherwise_Break9921
4 Comments
What do you mean ” took over running”? Did they actually buy it off the cousin? If not then he is still expecting part of the profits? This sounds like a partnership return.
You should nail down exactly what the deal is between your clients and the cousin. Did they buy him out? Do they operate the restaurant for him, and keep some or all of the profits as compensation? Who owns or rents the premises? Who owns the equipment and furniture? Who is accountable for city/county business registration and health code compliance? If the cousin is the only LLC member, then the only thing clear here is that your clients can’t file using the LLC EIN. Your clients might be wise to hire a lawyer to get all this in writing.
Do they have any types of contracts/operating agreements that give additional information?
I wouldn’t want to sign off on this until I got a lot more comfortable and saw some paperwork.
who owns the business?
if the cousin still owns the LLC, then the cousin owns the business and reports the activity on their tax return
if the couple purchased the LLC, then you need to consider whether or not a Form 1065 is needed for their ownership of the LLC and its activity. Hint – it almost certainly is required. And it’s late – and there are penalties for late filing of the returns – for 2024 and for 2025.
If you don’t know how to handle this, refer them to someone else.