LLC Legal/Tax Structure Dilemma

Hello dear communitarians! I am wondering if any of you might have some insights or experience to offer.

About two and a half years ago, a dear friend, who I will refer to as C, and I formed a multi-member LLC as the legal entity for our communal household, allowing us to more readily share income / expenses / bank account. At the end of June, C and her son moved to another community, and another single mother, who I will refer to as R, and her four kids came to stay here at Magnolia.

Before she left, C and I decided that she would legally remain a member until the end of this year, to simplify the SCC and tax filing and “hold a place” for another member, since we are the only two members currently. Now that R and her family have been with us for a few months and are interested in staying longer, and the turn of the year approaches, the legal question of membership is proving a bit complicated.

When C’s membership officially ends at the close of 2023, it seems that my two options will be to either convert The Magnolia Collective to a single-member LLC for the time being, or for R to join as a member. Both have advantages and disadvantages, but it is hard for me to weight the options when the information out there is geared towards conventional businesses with very different aims than ours, who aren’t asking and answering the following questions. Hoping that perhaps some of you with experiencing using the LLC structure for intentional communities might be able to offer more guidance:

  1. Is it necessary to change Magnolia’s designation with the IRS from multi-member to single member LLC right at the start of the year, if I am then the only member, or can Magnolia continue to be a multi-member LLC, even if for part of 2024 I am the only member? We will likely have another individual joining us soon, who may be interested in pursuing membership after a few months. It might also simplify and place less time-pressure on the membership decision for R if we don’t need to worry about continually having more than one member.

If a “gap” in having multiple members does require converting Magnolia to a single-member LLC, is it possible, and practical (i.e. not a paperwork labyrinth nightmare), to convert a multi-member LLC to a single-member LLC and then back to a multi-member LLC in the same year?

  1. Is it possible for one member to claim 0% of profits from the LLC? One of our hesitations in having R legally become a member is that this might jeopardize the social services benefits her family depends on. Our income as a Collective is small and unpredictable, derived from my part-time contract work, and I know we can divide the “profit” percentage however we wish. So the concern is not that that the reported income would push her above the threshold, but that the having to declare and explain this income (since it would appear on a K-1 and need to be filed), might raise some eyebrows and complicate the application process . When Magnolia membership came up when C attempted to apply for benefits, it brought up so many questions and confusion and complication that she ended up dropping her application, even though the actual income she derived still fell below the threshold.

Thank you for taking the time to read, and any thoughts or ideas you care to share. :slight_smile:

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After some more research today , I think I more or less understand how we need to proceed. Figured I’d note it here for reference, in case anyone else finds themselves in a similar situation, with the major caveat that I am not entirely confident I understand the process. If anyone is bringing more experience and knowledge about these matters, I certainly welcome your input.

A portion of ownership / investment / share of the profits and losses is precisely what makes someone a member. So one member claiming none of the profits is not an option. We decided that because of the risk to receiving needed benefits it does not make sense for R to legally become a member at this time, so I will need to shift Magnolia to a single-member LLC, by filing a change of articles with the SCC at the turn of the year, and then by filing a final K-1 and changing the tax election with Form 8832 when completing our tax return in March.

If another member joins before the end of the 2024, we would again file articles of amendment with the SCC, and file a “short” tax return with schedule C for the portion of the year that I was the only member, and then file a separate return for the rest of the year as a multi-member LLC again.

How I wish we had the legal structures to support resource sharing and collective entities, especially small scale initiatives like ours, that would fit our needs and aims better!

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I’m 55, and I have had home-based Schedule C businesses since I was 19. I always prepred my own taxes, and kept scrupulous bookkeeping. As a single-parent I also received FoodStamps, Medicaid and Section-8. EVERY SINGLE TIME I had to educate my caseworker on how to do the math. Pristine books are what saved me every time.

Case workers are trained to qualify based on check stubs and W2s. For self-employment this translates to monthly Profit/Loss Statements and end of year K-1 (or Schedule C), with the emphasis on the monthly Profit/Loss Statement.

Also, online you can find the food stamp manual that they base decisions from. Keep a copy, and if she needs to appeal, use the language from their own pages to make her case.

Cottage industries (schedule C, single member LLC) can get away with keeping books in a simple spreadsheet. but bookkeeping at the multi-member LLC level really need something more robust, that can do GAAP Accounting (double-entry). There are many courses online available to learn this. For accounting software, I use QuickBooks Online and GnuCash.

Assets also require an extra step. In addition to the standard bank statements, IRS/Savings account statements, the LLC Community should also produce a Balance Sheet (one-time snapshot during certification), breaking down the value of her “share”. If you are using good software, both the Balance Sheet and the Profit/Loss statements are simple reports to run and print off.

I hope this advice helps. Best of luck on your community venture :slight_smile:

Thank you for looking out for your friend’s wellbeing, with all those kids she needs her benefits more than she needs to be an official LLC member, I’m glad you understand her situation and are working with as a communitymate, so many of us who are on the lower income end of things struggle to get into a community situation that works for us.