Forming a husband and wife LLC can be a great way to organize your business. When you start any business it is important to set it up correctly and understand the tax consequences involved.
To form an LLC you need to name your limited liability company, selecting a name that is not in use by another business in your state. The secretary of state website will generally link to the database where you can search names.
Once you’ve chosen a name, you can start an LLC by designating a registered agent, a person or company that is authorized to do business in your state.
The registered agent is who will receive legal notices such as service of process and tax forms on behalf of your LLC spouse company. You can designate yourself in some states, but it generally best to choose a company that specializes in providing this service.
When your partner in marriage is also your partner in business, you have choices when setting up your company. A limited liability company (LLC) can be a great way to organize your business.
“Setting up an LLC with a spouse is one of the easier and more flexible entities you can establish," says John Blake, CPA, a partner with the New Jersey-based accounting and advisory firm Klatzkin.
Forming an LLC as a married couple follows the same steps as forming an LLC with any other partner in the business, says Kale Goodman, owner of Easier Accounting, an online accounting service provider.
If you decide an LLC is the right structure for your company, the first step is to select a name that's not currently in use by another business in your state. Your state's secretary of state website will generally link to the database where you can search names.
Once you've chosen a name, determine whether you need a registered agent, says Tegan Phelps, personal finance expert and author at The Blissful Budget.
“Some states require you to obtain a registered agent," she says. “A registered agent is an authorized person or company that will receive and process legal documentation on behalf of your business. It's important to understand your state's criteria as, in some states, you can designate yourself as the registered agent for your LLC."
You must also file a formation document with your state, typically called articles of organization, and pay a fee. Once your state accepts your articles of organization, you have officially formed an LLC owned by spouses.
Write an operating agreement
The next step is creating an LLC operating agreement, which is a contract between you and your spouse that specifies how your LLC will be governed.
“Even though you are in business with your spouse, one of the most important things you can do is have an operating agreement drafted using an attorney," Blake says. “This agreement will lay out the initial ownership structure and important details that will dictate different events, such as if one of the spouses no longer wants to be in the partnership, or the case of a divorce, or if one spouse were to pass away."
In your operating agreement, you can indicate what percentage of ownership you each have. However, if you live in a community property state and decide to divorce, the court will divide the LLC equally. The operating agreement also includes how you plan to handle a company closure or what to do in case one person wants to buy out the other in the future.
Keep in mind that you can arrange ownership any way you like and can even name just one spouse as the owner and designate the other as an employee. Income taxes and payroll taxes will need to be withheld for the employee spouse.
Apply for an EIN
No matter how ownership is set up, you will need to obtain an Employer Identification Number (EIN) through the Internal Revenue Services website. An EIN is like a Social Security number for your business. It identifies you for tax purposes and is needed to open a business bank account.
“This [EIN] application tells the IRS what type of business structure you have formed and what tax form you will be filing annually," Blake says. “This application is relatively simple and can be done online."
“There is no special EIN for married couples," Goodman adds. “From a tax perspective, whether it's a spouse or not, whose names are on the paperwork is what's important. The state views it as a partnership."
Understand tax implications
Because you are forming your LLC as spouses, you have some options when it comes to your LLC taxes. Income taxes from your LLC are based on your personal salary and profit from the business. If you choose to set up your LLC with just one spouse as a member, you can classify it as a sole proprietorship or a corporation. If your LLC has more than one member, you can classify it as a partnership or corporation.
If you choose to identify yourselves as a partnership, you'll pay tax personally on your income. Because you are married, the IRS allows you to divide each stream of income, expenses, and tax credits proportionate to your percentage of ownership in the LLC.
C Corp or S Corp
You can choose to identify as either a C corporation or an S corporation. As a C corporation you will also file your own tax returns. You will also personally file taxes and pay tax on your dividends, which are not tax-deductible for the LLC, so you end up paying a double tax on that income (once as the LLC and once as the member).
If you select an S corporation, income is reported by the LLC but is passed through to you as owners. You report that income yourselves but do not pay self-employment tax as a partnership would.
Consider a single-member LLC
“Since the money earned from an LLC flows through 100% to your personal return where you and your spouse file jointly, it is sometimes easier to just form one of the partners in the marriage in a single-member LLC," Goodman says. “Another thing to consider is that when you have a partnership, the tax filing deadline is March 15, not April 15, and the penalties are higher if you do not file that tax return on time."
Forming a business with a spouse provides potential tax-saving opportunities. “For example, both individuals may now be able to contribute more toward retirement," Blake says. “Some additional expenses can be deducted as business expenses. Also, forming a business with a spouse may open the door for the business to take advantage of several government programs aimed at helping protected classes of individuals."
Creating an LLC as a married couple gives you the opportunity to work together and leverage some tax flexibility. Make sure to follow the steps carefully so you can enjoy all of the benefits an LLC offers.