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Is creating an LLC as a married couple, and adding a professional element to your personal relationship, the best business decision to pursue? Will the union benefit from the ownership structure, management, liability 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 to help you determine if it is the right arrangement – personally and professionally.
Read on to discover how an LLC might be the perfect framework for your joint business venture.
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.
"By default, multi-member LLCs are taxed as a Partnership with the IRS, however, the IRS allows for husband and wife LLCs to be treated as “one unit”."
- Matt Horwitz, Leading Authority in LLC Education
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:
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.
The main advantages of a husband and wife Qualified Joint Venture LLC are:
To form an LLC with your spouse, you'll need to follow these six simple steps:
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.
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.
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]. According to the U.S. Small Business Administration, over 80% of small businesses opt for LLC formation due to its flexibility and protection benefits, emphasizing the popularity of this structure among entrepreneurs.
This document will outline the rules and regulations that govern your LLC.
The operating agreement should include:
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.
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.
After forming your single-member LLC, there are other things you need to consider. For example, you'll need to:
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 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:
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.
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.
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.
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.
If you're not interested in setting up a Joint Venture LLC, you may want to consider other options, even in community property states.
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.
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.
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.
Related Articles:
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.
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