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Self-Employed – Change of Filing Type – Determining New vs. Existing Business
Question:
Our Borrower has been self-employed, filing as a sole proprietorship (1040 Schedule C) for 7 years. In 2025, they transitioned to an LLC, with no change in ownership interest. Can this be considered the same business?
Answer:
There are specific requirements a lender must meet for the lender to consider the new business the same as the existing business.
You hit one of them directly, which means there can be no change in ownership interest.
Other requirements a lender/underwriter would need to confirm include:
· Confirming the 1120-S business sells the same products/services as the Schedule C business and is located in the same location/market.
· There must be no indication that the change had a negative impact on business revenue or expenses.
· The lender must document their evaluation of these factors in the written income analysis.
· There is sufficient data to arrive at an income calculation that the lender/underwriter can support, since the change did not happen until mid-2025. This can make it difficult for a lender to complete a full income analysis, since the 2025 personal and S-Corp returns have not yet been filed.
Summary for Your Scenario: For your borrower who transitioned from a Sole Proprietorship (Schedule C) to an LLC filing as an S-Corp (Schedule K-1) in 2025, this can generally be treated as the same business for qualifying purposes, particularly under Freddie Mac guidelines, as long as you can document that their ownership interest remained unchanged. You should document the transition clearly in the loan file, showing that the primary business operations and the borrower’s role/ownership remained consistent despite the change in legal entity type.
Mortgage Guideline Supporting Resources – Multiple Self-Employed Resources on our site, including Learning resources and charts. Type “Self-Employed” in our search library for all of the resources.
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