Inherited Single-Member LLC: Taxation & Planning

Your inherited LLC is structured as a single-member entity, typically taxed as a sole proprietorship. The key issues are maximizing the basis step-up and determining your operating strategy going forward.

Disregarded entity rules. A single-member LLC is a "disregarded entity" for federal tax purposes. The decedent reported business income on Schedule C, just like a sole proprietorship. You inherit the membership interest, not the individual assets, but the tax treatment flows through identically.

Membership interest transfer. Unlike a sole proprietorship, the LLC's operating agreement governs succession. Some agreements allow automatic transfer to heirs; others require member approval or trigger a buyout. Review the operating agreement immediately -- it overrides your assumptions about what you actually inherited.

Stepped-up basis applies. Because the membership interest is a capital asset passing from a decedent, IRC 1014 provides a stepped-up basis. The business assets inside the LLC effectively receive the step-up through your new basis in the membership interest.

The pitfall: If you add a co-owner (such as a sibling co-inheriting), the LLC becomes a multi-member LLC taxed as a partnership. That changes filing requirements, triggers Form 1065, and may require a new EIN.