If you no longer need to operate as an LLC, you might as well dissolve the entity, so that you can stop filing separate tax returns and paying the California $800 minimum tax. Before you do so, however, consider whether operating as a sole proprietorship is right for you.
Two common considerations are payroll taxes and limited liability. With an LLC, you can take a salary, which would be subject to the 15.3% FICA taxes. The other money that you draw from the company, other than your salary, is subject to income taxes, but not FICA. Your salary needs to be "reasonable." You can't, for example, take $5 per week and draw $5000 per week. The reasonableness of your salary is subject to IRS and Franchise Tax Board rules, so it would be a good idea to check with an accountant or other tax professional, regarding reasonableness in your type of business. Often, this 15.3% savings is far greater than the $800 minimum state tax.
Second, an LLC offers you a shield to having personal liability for matters that arise in the course of your business. You will need to determine whether taking on the personal risk of liability is warranted.
In addition to the option of simply dissolving the LLC, you may want to consider a short agreement to transfer the other LLC interests to you via a written document. That way, with the caveat of any pending liabilities, you would obtain 100% ownership of the LLC interests. If any concerns, read http://www.californiabusinessdevelopmentattorneys.com/Corporations___LLCs.html#infform_id0_h611_w868
Shawn Jackson ESQ. (707) 584-4529
Business Development Attorney EMAIL: Attorneys@CaliforniaBusinessDevelopment.com
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I think Mr. Saltzman's answer deserves a little clarification: If you do continue as a single-member LLC (an "SMLLC"), you will be presumed to be a sole proprietor for tax purposes. All of the company's income, deductions, etc. will be reported on Schedule C of your personal return, just as though the LLC didn't exist. (It's said to be a "disregarded entity" in this circumstance.) The company will still be an LLC for all other purposes (like limited liability), just not for tax purposes. Note, however, that you CANNOT draw a salary from a SMLLC, just like you couldn't pay yourself a salary as a sole proprietor. Rather, the net income from the company will be taxed directly to you and subject to the normal income tax as well as the tax on self-employment income.
An SMLLC can make a special election to avoid the default classification as a disregarded entity, however. You would file a form with the IRS and elect instead that the LLC be taxed as a corporation. You can now take a normal salary (with the reasonableness restrictions Mr. Saltzman describes). If you leave the company as a C corporation, any earnings in excess of your salary will be subject to the corporate income tax, then to the tax on dividends if those earnings are in turn distributed to you. Because the entity is now a corporation for tax purposes, however, you can make an S election instead. You will still have to draw a reasonable salary, but the excess earnings will pass through to you as they did when the LLC was taxed as a partnership, albeit without the additional tax on SE income.
One other note: If your former partner has already withdrawn from the LLC, then your partnership has already automatically terminated for tax purposes. Be advised that this triggers certain liquidation events that could have unexpected tax consequences. You should consult with a tax professional about what those consequences might be in the circumstances of your company.