LLCs Co-Owned by Spouses (Guide to a Husband & Wife LLC)
Creating an LLC as a married couple adds a professional element to your personal relationship, and it may be structured based on ownership, management, asset protection, and tax options.
As a business consultant specializing in limited liability companies, I have over a decade of practice addressing clients’ concerns regarding LLC formation and operations.
I’ll provide you with a comprehensive guide on establishing an LLC co-owned by spouses, based on in-depth research and legal advice from our panel of professionals.
Quick Summary
- LLCs co-owned by spouses is classified as a Qualified Joint Venture company that simplifies the organizational and operational structure, allowing married couples to be recognized as a single entity for tax purposes.
- To qualify, the LLC must be created in a community property state, be solely owned by the married couple, both spouses must actively manage the firm, they must file a joint federal income tax return, and the LLC shouldn't opt to be taxed as a corporation.
- The Internal Revenue Service (IRS) recognizes businesses co-owned by spouses as disregarded entities (single-member LLCs) for federal income tax purposes.
- Co-owning an LLC as spouses not only streamlines tax processes but also strengthens asset protection, ensuring both partners have a clear stake and say in the business's operations.
What is an LLC Co-Owned by Spouses?
An LLC co-owned by spouses, also referred to as Qualified Joint Venture LLC, is a special federal tax classification.
It is a disregarded entity in which the husband and wife are the only limited liability company members and each spouse has an ownership interest of at least 50%.
Since the married couple is recognized as a single entity, the business is not taxed as a partnership or multi-member LLC.
A QJV allows a husband-wife-owned business to file a single business tax instead of individual returns, making the process simpler and faster.
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, you can have your entity classified as a Single Member LLC.
Requirements of a Qualified Joint Venture LLC
If a married couple creates a limited liability company 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:
- The LLC is established/created in a community property state.
- 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 joint 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.
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: You can save money from filing fees since there are fewer tax returns to be submitted.
- Social Security and Medicare: Since these LLC 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 taxes).
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 LLC that is not currently used by another firm in your state. The Secretary of State's website provides a database containing all registered entities in the state.
2. Identify your registered agent
Choose your registered agent – a person or firm that is authorized to conduct business in your state. The LLC 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.
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
The LLC Articles of Organization, also referred to as a Certificate of Organization, is a document that officially establishes your LLC. It will include basic information about your company such as its name, registered agent, and purpose.
File your LLC paperwork with the Secretary of State's office [1].
4. Draft an LLC operating agreement
This document will outline the rules and regulations that govern your LLC.
The operating agreement should include:
- Management structure.
- The names and addresses of the members.
- Profits and liability distribution.
- Decision-making.
- 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.
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 federal 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 and address.
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, especially in community property states.
Other Things To Consider
After forming your single-member 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 an LLC business bank account.
- Purchase liability insurance.
Understand Tax Implications
LLCs are classified as pass-through entities for federal tax purposes, meaning the company's income and losses are passed through to individual members who report this information on their personal tax returns, including self-employment tax.
The IRS recognizes the LLC as a disregarded entity for federal tax purposes, meaning it isn't taxed the same as a multi-member LLC.
In community property states, LLCs follow community property laws, which treat the income and assets as equally belonging to both spouses. If only one spouse is an LLC member, they are considered the sole owner for federal tax purposes.
It is recommended to seek guidance from an attorney or accountant familiar with the intricacies of LLCs to navigate the legal and tax implications effectively. It's especially true when you're in community property states.
Estate Planning Benefits of Co-Owning an LLC as Spouses
Estate planning is a critical aspect of securing your financial legacy and ensuring the smooth transfer of assets to your heirs and beneficiaries.
Co-owning an LLC as spouses can be a strategic and integral part of a comprehensive estate planning strategy. This arrangement offers several distinct advantages:
Inheritance Planning
Co-owning an LLC with your spouse provides a structured and legally recognized framework for managing assets and business interests. In the event of the passing of one spouse, the ownership structure ensures a clear path for the surviving spouse to inherit the deceased spouse's share of the business.
Asset Protection
An LLC offers a layer of protection for the personal assets of its members. When spouses co-own an LLC, their personal assets are typically shielded from business liabilities. In the event of legal claims or financial difficulties faced by the LLC, the couple's personal assets, such as their home or savings, are generally safeguarded.
Tax Efficiency
Estate taxes can significantly impact the transfer of wealth between spouses and heirs. Co-owning an LLC can provide tax advantages, especially in terms of gift and estate tax planning. The structure allows for the strategic allocation of ownership interests, which can minimize tax liabilities and maximize the assets passed on to heirs.
Business Continuity
For couples who run a business together, co-owning an LLC ensures that the business can continue operating smoothly in the event of one spouse's passing. The surviving spouse can seamlessly assume control of the business without disruption, preserving its value and the livelihoods it supports.
Alternative Options
If you're not interested in setting up a Joint Venture LLC, you may want to consider other options, even in community property states.
1. 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.
Kristin Grant, managing attorney at Grant Attorneys at Law, pointed out that a sole proprietorship is an unincorporated business, so there aren’t many legal formalities or upkeep needs.
However, unlike with an incorporated firm, a sole proprietorship’s owner does not have limited liability protection – which can put his or her personal assets in danger.
2. 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.
3. 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.
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FAQs
Should My Spouse Be a Member of My LLC?
Your spouse should be a member of your LLC If you're operating your business entity in a community property state.
Is a Husband and Wife Considered a Single-Member LLC?
A husband and wife spouse is considered to be a single-member LLC in states that implement community property law, as such the business may be taxed as a disregarded entity. It applies even when both spouses materially participate in the company.
