Creating an LLC as a married couple adds a professional element to your personal relationship, but the way you choose to do it is dependent on management and tax options. It's possible to set up any business entity properly and understand the tax ramifications.
What is a Qualified Joint Venture LLC?
There is a special federal tax classification for LLCs co-owned by spouses - a Qualified Joint Venture (QJV).
A QJV is an LLC entity in which the husband and wife are the only LLC members and each spouse has an ownership interest of at least 50%.
This classification allows the couple to split their income equally, which can be beneficial on their federal income tax return.
Another way to express "married couple single-member LLC" or "husband and wife single-member LLC" is to use the phrase "married couple single-member LLC."
With the exception of husband- and wife-owned LLCs in community property states. For federal tax purposes, the husband and wife are considered a single "unit" in community property states and will also be a disregarded entity.
If you can show that you are legally married and satisfy the above criteria and have your LLC classified as a Single Member LLC, you may opt to have it as a disregarded entity.
Requirements of a Qualified Joint Venture LLC
If a married couple creates an LLC in a "common law property state," they are not eligible for the Qualified Joint Ventures.
If a married couple forms an LLC in a community property state, they can qualify for the Qualified Joint Venture option if they satisfy the following requirements:
- In a community property state, the LLC is established/created.
- The married pair are the only LLC owners (there are no other people or firms that own the LLC).
- Both spouses actively contribute to and manage the firm.
- The married pair files a joint federal income tax return.
- The LLC has not chosen to be taxed as a corporation.
There are federal tax purposes for married couples to operate as a qualified joint venture LLC. This is a designation that allows the two spouses to file a single tax return but still maintain their separate legal identities.
Community property states will recognize the LLC as community property as well, meaning income and expenses from the business will be divided equally between husband and wife on their individual state tax returns.
There are some definite benefits to operating an LLC as a married couple, and it's important to choose the right option for your situation. For more information, speak to an accountant or tax return specialist in your area.
Advantages of Husband and Wife Qualified Joint Venture LLC
The main advantages of a husband and wife Qualified Joint Venture LLC are:
- Save time: A married couple eliminates the extra paperwork and record-keeping hassles that come with being in a Partnership.
- Save money: The married couple gains on accountancy and tax preparation costs. Instead of filing a 1065 Partnership return, K-1s, and then separate 1040 forms for each spouse, the married couple's accountant will simply submit a Schedule C with Form 1040 for one of the spouses.
- Social security and Medicare: Since these taxes are calculated on an accumulated basis, the married couple may get more credit for paying Social Security and Medicare payments (without having to pay extra in taxes).
Disadvantages of Husband and Wife Qualified Joint Venture LLC
There are a couple of disadvantages to consider when choosing to operate as a husband and wife Qualified Joint Venture LLC.
- Losses: A qualified joint venture cannot offset any other type of income with the losses generated from the business. For example, if one spouse has wage income and the other has QJV income, the wage earner cannot use the QJV losses to offset the wage income.
- Limited liability: Both spouses have unlimited personal liability for the debts and obligations of the LLC.
- Management: If one spouse dies or is incapacitated, the other spouse will need to take on full responsibility for managing the LLC.
Overall, the husband and wife Qualified Joint Venture LLC offers several advantages and disadvantages that should be considered before making a final decision. For more information, speak to an accountant or tax specialist in your area.
6 Steps To Form An LLC With Your Spouse
To form an LLC with your spouse, you'll need to follow these six simple steps:
1. Confirm that the name you want to use is available
To establish an LLC, you must choose a name for your company that is not currently used by another firm in your state. The secretary of state's website will often link to the database where you can look up names.
2. Identify your registered agent
Choose your registered agent, a person or firm that is authorized to conduct business in your state. The registered agent is the individual or company who will accept legal notifications such as service of process and tax forms on behalf of your LLC spouse company.
In some states, you have the option of choosing yourself; however, it's generally better to go with a professional service.
3. File the articles of organization
This is the document that officially establishes your LLC. It will include basic information about your company such as its name, registered agent, and purpose.
You can find a template for the articles of organization on the internet or in a business law book.
With the Secretary of State's office, file your LLC paperwork. This document is generally referred to as the Articles of Organization, although in a few states it may be known as a Certificate of Organization or Formation.
4. Draft an operating agreement
This document will outline the rules and regulations that govern your LLC. It's important to have an operating agreement, even if you're the only member of your company. The agreement should address topics such as membership, management, financials, and dissolution.
The operating agreement should include:
- The date on which your LLC was established.
- The name and address of the Registered Office and Registered Agent must be provided.
- The LLC's primary commercial goal.
- The percentage that a member's capital is owned by the group.
- The names and addresses of the members.
5. Apply for an EIN
An Employer Identification Number (EIN) is a nine-digit number that is assigned to businesses by the Internal Revenue Service (IRS). It's used to track business income and expenses for tax purposes. You'll need an EIN even if you're the only member of your LLC.
You can apply for an EIN online or by mail. Be prepared to provide some basic information about your company, such as its name, address, and EIN.
Obtain a Federal Tax Identification Number from the IRS (also known as an EIN). Fill out the IRS' online EIN application. When you click your state on the next screen, the IRS will request whether you are a husband-and-wife business entity.
Yes is the choice to make. Then, on the following page, you must select Limited Liability Company (LLC) as your type of business entity.
6. Obtain business licenses and permits
Depending on the type of business you operate and the state in which you reside, you may need to obtain various business licenses and permits. Check with your local chamber of commerce or licensing bureau for more information.
LLCs have become a popular way to do business in recent years and for good reason. They offer a number of advantages over other business structures, such as sole proprietorships and partnerships. One of the drawbacks of LLCs, however, is that they can be more complicated to set up than other types of businesses.
Other Things To Consider
After forming your LLC, there are other things you need to consider. For example, you'll need to:
- Decide who will manage the company.
- Develop a system for tracking income and expenses.
- Choose a banking institution and open a business checking account.
- Purchase liability insurance.
As with any new business, there is a lot of work that goes into getting it off the ground. But with a little effort and planning, your LLC can be up and running in no time.
Understand Tax Implications
When it comes to federal tax purposes, LLCs are classified as pass-through entities. This means that the income and losses of the company are passed through to the individual members. The members then report this information on their personal tax returns also known as self-employment tax.
The IRS will accept the entity as a disregarded entity for federal tax purposes.
In addition, LLCs are treated as community property states that have community property states laws. This means that the income and assets of the Limited Liability Company are considered to belong equally to husband and wife. If one spouse is the only member of the Limited Liability Company, then that spouse is considered to be the only owner for federal tax purposes.
LLCs offer a number of advantages over other business structures, such as sole proprietorships and partnerships. One of the drawbacks of LLCs, however, is that they can be more complicated to set up than other types of businesses.
Before forming a Limited Liability Company, be sure to consult with an attorney or accountant who can help you navigate the complex legal and tax implications.
When it comes to federal tax purposes, LLCs are classified as pass-through entities. This means that the income and losses of the company are passed through to the individual members. The members then report this information on their personal tax returns.
In addition, LLCs are treated as community property in states that have community property laws. This means that the income and assets of the LLC are considered to belong equally to both spouses.
Alternative Options
If you're not interested in setting up a Joint Venture LLC, you may want to consider other options.
Sole Proprietor
A sole proprietorship is the simplest type of business structure and doesn't require any paperwork or filing with the state. However, as a sole proprietor, you are personally liable for any debts or liabilities incurred by your business.
Hire Your Spouse as an Employee
Another option is to hire your spouse as an employee. This will give your spouse some protection from personal liability. However, you will need to pay payroll taxes and file employment tax returns.
Form a Partnership
If you want to share the responsibilities of running your business with your spouse, you may want to consider forming a partnership. This is a more complex structure than a sole proprietorship or LLC and requires the filing of a partnership agreement with the state. In a partnership, each spouse is considered to be an equal owner.
There are a number of things to consider when choosing the right business structure for your LLC. Be sure to consult with an attorney or accountant who can help you make the right decision for your business.
Similar Article: Should You Start an LLC for Day Trading
FAQs
Should My Spouse Be a Member of My LLC?
If you're operating your LLC in a community property state, your spouse must be a member of the company. If you're operating in a non-community property state, there is no requirement that your spouse be a member of the LLC.
Is a Husband and Wife Considered a Single-Member LLC?
A spouse is considered to be a single-member LLC if they are the only members of the company. In all other cases, the LLC is treated as a multi-member LLC.
Can LLC Member Be a Married Couple?
Yes, married couples can be members of an LLC. However, if the LLC is operating in a community property state, the spouses must be members of the company.
Can a Spouse Be Business Partners?
Yes, a spouse can be business partners in a partnership. In this case, each spouse is considered to be an equal owner.
How Does a Husband and Wife LLC Get Classified for Tax Purposes?
A husband and wife LLC is typically treated as a partnership for federal tax purposes. However, in community property states, spouses can opt to classify their LLC as a "Qualified Joint Venture". This will allow you to file as a disregarded entity and avoid partnership returns, as per IRS regulations.
LLC for Spouses: Conclusion
LLCs offer a number of advantages over other types of businesses, such as sole proprietorships and partnerships. One of the drawbacks of LLCs, however, is that they can be more complicated to set up than other types of businesses.
Before forming an LLC, be sure to consult with an attorney or accountant who can help you navigate the complex legal and tax implications.
