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.

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.

2. Bankruptcy Protection

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.

3. The Risk of Divorce

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.

Conclusion

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.

Frequently Asked Questions

1. Is A Husband And Wife Llc A Singlemember?

No! 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. But if your LLC has more than one member, you can classify it as a partnership or corporation.

2. How Does A Two Member Llc File Taxes?

Two-member LLCs are taxed as partnerships and do not file or pay taxes as the LLC. Instead, the profits and losses are the responsibility of each member; they will pay taxes on their share of the profits and losses by filling out Schedule E (Form 1040) and attaching it to their personal tax return.

3. Advantages Of Husband And Wife Qualified Joint Venture Llc?

Here are some advantages of husband and wife joint business;

  • No need to pay for creating an LLC or even for an EIN
  • Taxes and record-keeping requirements are less stringent
  • Both spouses can get credit for social security taxes and medicare coverage
  • It’s less expensive and easier to file two Schedule C business tax forms than to file a complicated partnership income tax return for your business.
4. Should Both Spouses Be On Llc?

The short answer is no! You are not required to name your spouse anywhere in the LLC documents, especially if they aren’t directly involved in the business. But in some cases, there are some occasions where it may be helpful or necessary to include your spouse.

5. Is An Llc A Marital Asset?

It depends, for instance, if your LLC was created before marriage, it can be considered as marital property if you invested marital property in it. Note: An LLC is a financial asset and, as such, should be appraised during the separation process.

6. How To Change Husband-Wife Partnership Llc To A Qualified Joint Venture?

These are the steps to change husband-wife partnership LLC to a qualified joint venture;

  • Make sure the LLC is formed in a community property state and you meet the requirements listed above
  • Download this qualified joint venture notification letter
  • Mail your letter to the IRS
7. Can A Husband Wife With An Llc File A Schedule C Instead Of 1065?

Practically, partnerships file income taxes on form 1065. But a husband-wife partnership may be eligible to be considered as a qualified joint venture and to file using Schedule C, under certain circumstances. So in this case, each owner must file a separate Schedule C, dividing up all of the income and expenses.

8. Can An Llc Owned By Husband Wife Change Tax Filing Status?

Yes, it can. Almost all married people do file a joint tax return.

9. Can You Pay Your Spouse From Your Llc?

Generally, a spouse can actually work for a limited liability company (LLC) without receiving pay. While federal and state wage and hour laws usually require that anyone who works for a private company such as an LLC must receive payment for their work, spouses are often exempt from these requirements.

10 Does An Llc Protect Me In A Divorce?

Yes! Forming an LLC or corporation can help protect your business assets in case of divorce, especially if you incorporate them before you get married. Even if you’re the sole owner of the business, you can still form an LLC or corporation.

11. How Do You Add Your Wife To Your Llc?

Follow these simple guidelines to add your spouse to your LLC;

  • Understand the consequences
  • Review your operating agreement
  • Decide on the specifics
  • Prepare and vote on an amendment to add owner to LLC
  • Amend the articles of organization (if necessary)
  • Then file any required tax forms
12. Should Your Wife Be On Your Llc?

The simple answer is no! You are not required to name your spouse anywhere in the LLC documents, especially if they aren’t directly involved in the business. However, there are some occasions where it may be helpful or necessary to include your spouse.

13. What Is The Difference Between A Single Member Llc And An Llc?

A single-member LLC is easier for tax purposes because no federal tax return is required unless the business decides to be treated as a corporation for tax purposes. The income is reported on the member’s tax return. A multiple-member LLC must file a tax return, and give the members K-1 forms to file with their returns.

14. Can A Single Member Llc Change Ownership?

If your LLC has just one member (that is, you as a single person), yes you can change or sell the LLC to another person or company.

15. Can There Be Two Owners In An Llc?

Yes! There is no limit to the number of owners an LLC can have. Whether an LLC is a one-owner or two-owner LLC will change how your LLC is taxed.

16. Can A Single Member Llc Have 2 Owners?

Yes! LLCs can have single or multiple owners, known as members.

17. How Does A Husband And Wife Llc File Taxes?

Income, deductions, asset gain, or loss must be divided between each spouse based on the percentage of their ownership in the LLC. Then each spouse must file a separate Schedule C or C-EZ and will also file a Schedule SE to pay any self-employment tax.

18. Can You Pay Your Wife To Manage Your Property?

The short answer is no. An owner cannot pay themselves to manage the property they own.

19. Is A Single Member Llc An Independent Contractor?

Yes! An independent contractor is a person who runs a one-owner business.

20. Can Your Wife Work For Your Llc?

Of course yes, a spouse can actually work for a limited liability company (LLC) without receiving pay.

21. Can A Single Member Llc Become A Multimember Llc?

Yes! To convert a single-member LLC to a multi-member LLC, you’ll need to check with the secretary of state. The secretary of state is responsible for business filings. The written agreement must be signed by both new and existing members.

22. Can You Transfer Money To Your Wife Without Tax Implications?

Yes, you can transfer money to your wife. This has no income tax implications and is not considered as an income in the receiver’s hands.

23. How Many Owners Can Be In An Llc?

There are no restrictions to the number of members (owners) an LLC can have.

24. What Is The Sole Owner Of An Llc Called?

Sole Proprietor. The IRS considers the owner of a one-member LLC as a sole proprietor.

25. Is It Better To Be A Singlemember Llc Or Multimember Llc?

It is better with single-member LLC. A single-member LLC is easier for tax purposes because no federal tax return is required unless the business decides to be treated as a corporation for tax purposes. The income is reported on the member’s tax return. A multiple-member LLC must file tax returns, and give the members K-1 forms to file their returns.

26. How Do Multiple Owners Of An Llc Get Paid?

To get paid by the business, LLC members take money out of their share of the company’s profits.

27. How Do Llc Owners Get Paid?

The LLC owners take a draw from their capital account. Payment is usually made by a business check. They can also receive non-salary payments or guaranteed payments— basically, a payment that is made regardless of whether the LLC has generated any net income that month or quarter.

28. Are Owners Of An Llc Considered Employees?

Certainly not. An LLC’s owners cannot be considered employees of their company nor can they receive compensation in the form of wages and salaries.

29. What Are Tax Issues With An Llc Owning A Rental Property?

The major tax issues of having LLC rental properties include a lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood’s appeal to decline.

30. What is The Difference Between A Partnership A C Corporation?

A partnership involves two or more people who combine resources for the business and share profits and losses as well. While a corporation is considered to be a separate legal entity from its shareholders.

31. Can You Pay Your Wife To Do Bookkeeping?

Absolutely yes! Sole traders, partnerships, companies, or even trusts can pay spouses a regular wage for services like bookkeeping and administration.

32. Can An Llc Have 1 Member?

Absolutely yes, a single-member LLC is a limited liability company with one owner.

33. Does A Two Member Llc Have To File A Tax Return?

No! Two-member LLCs are taxed as partnerships and do not file or pay taxes as the LLC.

34. How Do You Qualify For The Foreign Earned Income Exclusion?
  • The tax must be imposed on you
  • You must have paid or accrued the tax
  • The tax must be the legal and actual foreign tax liability
  • The tax must be an income tax (or a tax in lieu of an income tax)
35. What Is The Downside Of An Llc?

An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states also impose ongoing fees, such as annual reports and franchise tax fees.

36. How Do You Know If Your Llc Is A Disregarded Entity?

If a single-member LLC does not elect to be treated as a corporation, the LLC is a disregarded entity, and the LLC’s activities are expected to be reflected on its owner’s federal tax return.

37. What Closing Costs Can You Deduct?
  • Mortgage insurance premiums
  • Prepaid interest
  • Origination fees
  • Property taxes
  • Points
38. If I Don’t Qualify For The Housing Deduction, Can You Still Deduct Expenses?

Yes! You can deduct mortgage interest, property taxes, and other expenses up to specific limits if you itemize deductions on your tax return.

39. What Is The Difference Between Foreign Tax Credit And Deduction?

A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax, meaning you can choose to take the foreign tax credit even if you do not itemize your deductions.

40. What Is The Marriage Penalty And How Does It Affect Your Tax Returns?

A marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty usually occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples.