Single member LLC vs Multi-member LLC, which is best for married people? Here are factors to consider before forming an LLC as husband and wife. A limited liability company (LLC) is a business that operates like a partnership but has the benefit of added liability protection. While it operates similarly to a partnership, it is not legally a partnership, and it is just treated this way for tax purposes.
What is the Difference Between Single Member LLC and Multi-Member LLC?
Although the major difference between a Single – member LLC (SLLC) and a Multi – member LLC may already be obvious due to the names, these variations of the Limited Liability Company business structure have other pertinent factors to be considered.
Both the single member LLC and the multi member LLC share many characteristics, but there’s more than just the difference in the number of owners to consider when deciding whether one or the other might be a good fit for couples.
However, in community property states, married people can have a single – member limited liability company (SMLLC) with not one but two members—or at least have a two – member LLC that’s treated like an SMLLC for tax purposes.
Single Member LLC Vs Multi-Member LLC – Which is the Best for Married People?
If you’re married and you live in one of the nine current community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), then you can form an SMLLC. Note that these states have laws stating that property acquired by a married individual is owned in common with that individual’s spouse.
Also know that those laws can extend to profits from an LLC owned solely by two people married to each other. In the United States, the IRS has issued a special rule applicable to LLCs owned by married couples who live in community property states.
Under this rule, a married couple can treat their jointly owned business as a disregarded entity for federal tax purposes as long as the LLC is wholly owned by the husband and wife as community property under state law, no one else would be considered an owner for federal tax purposes, and the business is not otherwise treated as a corporation under federal law.
Howbeit, this would entail that the spouses would file a joint tax return (with the general tax savings that come with such a return), and include with that return a Schedule C, and any other relevant schedules (Schedule SE, Schedule E, and so on), for their business. Also note that for all practical (tax) purposes, they would prepare their taxes as though their LLC were an SMLLC. This includes same – sex couples who are legally married under state law.
Nonetheless, if a married couple in these community property states does not meet the requirements of the IRS special rule, then their jointly – owned LLC would be treated like any other multi – member LLC which means it would be taxed as a partnership, not as a disregarded entity.
Also, couples in non – community states cannot form a single Member LLC. As a partnership, an LLC has additional tax reporting requirements that don’t apply to a disregarded entity, such as filing a partnership tax return.
Always have it in mind that if you choose to form your business as an SMLLC, with yourself as the sole company member, but then have your spouse do work for that business, it will be imperative to keep clear records showing your spouse’s status.
However, depending on the circumstances, your spouse could variously be considered an employee, an independent contractor, or—in spite of not officially appearing in an operating agreement as such—an additional LLC member. These different possibilities each have their own implications regarding tax obligations and potential liability.
4 Factors to Consider Before Forming an LLC as Married Couples
First and foremost, note that specific statutes for single – and multi – member LLCs vary from state to state. However, an understanding of some crucial factors can help you to decide whether you and your spouse should both be listed as members of the LLC.
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1. Business Involvement
Note that in some cases; only one spouse may have any actual involvement in the running of the LLC, while the other may intend to remain completely uninvolved. In these cases, have it in mind that it might seem natural to adopt the single – member LLC model. Nonetheless, if a husband and wife agree that they prefer to get any added protection that a multi – member LLC can offer, they may find it critical to adopt a multi – member LLC model.
In this case, the second member is expected to be able to show at least some level of involvement in the company’s operations and decisions. Otherwise, according to Keyt Law, a court may later define her as a “sham member” and rule that the LLC is a single – member LLC.
Even though both single – member and multi – member LLCs tend to provide the same level of protection of personal assets from company liabilities, the same cannot be said for protecting the company from personal liabilities. For example, in a Chapter 7 bankruptcy case, the court reserves the power to seize many types of assets belonging to the person who has declared bankruptcy.
If an LLC is a multi – member LLC, this seizure of assets usually cannot extend to company assets without the consent of the other members, as it would more or less result in the court taking one person’s assets due to another person’s bankruptcy. Howbeit, in a single – member LLC, the court may view company assets as being synonymous with owner assets, seizing anything valuable owned by the company to sell it off and pay the owner’s debts.
In the United States, when married couples file for divorce, they tend to go to court regarding the partition of assets. An LLC can be a very valuable asset. If one spouse owns a single – member LLC, the other spouse might be entitled to all or a portion of that LLC’s assets. Note that this decision is something that occurs on a case – by – case basis after a fair amount of litigation.
In the case of a multi – member LLC, the operating agreement is expected to explicitly state the amount of the company that each member owns. In this case, the court may simply rule that each spouse remains with the share of the business apportioned in the operating agreement.
4. Differences in Taxation
Have it in mind that corporate income in the United States is often double – taxed in that both the company and the shareholders are expected to pay income tax. LLCs, on the other hand, only have their income taxed on the owner’s level. Howbeit, on the company level, no difference exists between single – and multi – member LLCs when it comes to income taxation.
On the personal level, a married couple may experience a difference when it comes to taxation of personal income. For instance, if a married couple files separate tax returns and only one spouse owns the LLC, the profits from the LLC may put that individual into a higher tax bracket, resulting in a higher tax rate. If a married couple files a joint tax return under a single – member LLC or if both spouses are members of the LLC, this may not happen.
How a Husband and Wife Can Form an LLC
If you and your spouse are planning to set up an LLC you may wonder what paperwork you have to file. When you start a business it is imperative to start correctly and understand the tax consequences involved. As spouses, you are expected to set up your company as any other two people would, but you have different tax options available to you.
i. Get Started
Note that to form an LLC you need to name your limited liability company; you will have to choose a name that is not in use by another business in your state. Note that your state Secretary of State website will generally have a link to the database where you can search names.
Immediately you have 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. Note that 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 ideal to choose a company that specializes in providing this service.
ii. Be Organized
As husband and wife looking to form an LLC, you are expected to file documents with your state and pay a fee. Note that to make your LLC husband and wife company official, you will need to establish an articles of organization which acts like a charter for your business. You will also have to file these with your state.
You are also expected to file a formation document found on your state business registrar site that provides the name of your LLC Spouse Company, address, and registered agent, length of existence and name and address of at least one owner who is filing. Once your state accepts your articles of organization, you have officially formed an LLC owned by husband and wife.
iii. Get Going
At this point when your LLC is in place, you are expected to create an LLC operating agreement. This is a contract between you and your spouse that explicitly states your management plan and the agreement you have should the company close or if one of you needs to buy the other out in the future. Note that you will indicate what percentage of ownership you each have, but if you live in a community property state this designation will not matter should you divorce.
Note that in such a situation, the court will divide the LLC 50/50. Always remember that you can arrange ownership any way you like and can even name just one spouse as an owner and designate the other as an employee. Income tax and FICA will need to be withheld for the employee spouse. Irrespective of how ownership is set up, you will need to obtain an Employer Identification Number (EIN) through the IRS web site.
iv. Understand Taxes
Right before you form your LLC as husband and wife, you have some options when it comes to your LLC taxes. Note that your income taxes from your LLC are more or less based on your personal salary and profit from the business. Notwithstanding, if you choose to set up your LLC with just one spouse as a member, you can classify it as a sole proprietorship.
If your LLC has more than one member, you can classify it as a partnership or as corporation. Also if you decide to identify yourselves as a partnership, the LLC does not file tax returns and you pay tax personally on your income. But since you are married, the IRS lets you to divide each stream of income, expenses, and tax credits proportionate to your percentage of ownership in the LLC.
Also note that you can choose to identify as a corporation and must choose a C corporation or an S corporation. A C corporation will file its own tax return. 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).
However, if you choose an S corporation, income is reported by the LLC but is passed through to you as owners and then you report that income yourselves but do not pay self – employment tax as a partnership would.
Creating an LLC as a married couple offers you the platform to work together and leverage some tax flexibility. However, it is pertinent you consider your options extensively and make adequate research before taking any crucial step. Follow the steps carefully to set up your LLC correctly and enjoy the benefits it offers.