Navigating the small business world can be confusing and, sometimes, downright frustrating. Whether or not you should add a spouse, friend, or family member to your LLC is one of those situations that aren’t always clear-cut.
While you’re not required to add your spouse to your Limited Liability Company, doing so has both benefits and drawbacks. We’ll walk you through those points in this article.
Adding Your Spouse as an Owner: Is It a Good Idea?
Adding your spouse as a co-owner of your LLC is a bit complicated because, after doing so, you can classify your LLC as one of two things: a partnership or a sole proprietorship. In most places, a spouse can be added as an owner to an LLC without classifying them as an employee or partner, which would then maintain your business’ sole proprietorship status.
If your business was not a sole proprietorship before adding your spouse to it, this doesn’t work anyway. Similarly, if you prefer, you can add your spouse and create a partnership instead of a sole proprietorship.
Whether adding your spouse as an LLC owner is a good idea or not depends on how much you trust your spouse, how well you get along, and your marital stability. Just as you wouldn’t add a stranger who’s terrible with money management as a partner of your LLC, you shouldn’t add your spouse if they’re unable to help.
Additionally, if you have a rocky relationship with your spouse, you may want to consider holding off on adding them to the LLC. If you do add them, then end your relationship, it can make it much more difficult to remove them from the LLC down the line. There are also some minor tax differences when you add your spouse to your LLC, which we’ll get into below.
LLC Joint Ownership With Your Spouse: Qualified Joint Ventures
There is one main thing to consider when owning an LLC with your spouse, and whether you can utilize it at all depends on where you live. To meet the requirements of a “qualified joint venture,” or an LLC where both spouses are co-owners and are considered a single-member LLC in the eyes of the Internal Revenue Service (IRS), you must first live in a Community Property State.
A married couple filing a joint tax return who conduct their business activities as a qualified joint venture, the spouses must divide the profits or losses of the business by their ownership interests.
The Small Business and Work Opportunity Tax Act of 2007 provides that a qualified joint venture whose only members are a husband and wife who are filing a joint return, can elect not to be treated as a partnership for federal tax purposes and instead be treated as a disregarded entity.
A husband and wife owning an LLC in a community property state can be considered one owner, or in the case of an LLC, one member and therefore become a disregarded entity for federal tax purposes. The business activities are then reported on their Form 1040 Schedule C in their income tax returns.
The only Community Property States currently in the USA include:
- New Mexico
If you live in any other state in the USA, you live in a Common Law Property State and do not qualify to launch a qualified joint venture.
That’s not all – to start a qualified joint venture, you also have to meet several other criteria. The first is that the only LLC owners can be the spouses who file a joint return. In other words, you can’t decide to add a friend of yours to the LLC down the line; if you do, it’ll lose status as a single-member LLC.
The next criteria you must meet is that both of you must help run the business in some way, and ideally, the work should be split evenly. Both spouses need to do something material to help maintain the business.
Next, the married couple needs to act with the intent to file their taxes jointly. And finally, the LLC cannot elect to be taxed as a corporation. As long as both spouses meet all of these considerations, they can decide to act as a single-member LLC.
What’s the benefit of acting as a single-member LLC? The only real difference between that and operating as a partnership shows when tax season comes around. This is because a single-member LLC can file their taxes on a Schedule C with their 1040 forms. A partnership must submit a separate tax form set, which can consume much more time and resources.
One of the downsides (or perhaps upsides) could be that community property states have laws any property acquired by a married individual while married is owned in common and those assets are evenly split in the event of a divorce.
How Do I Add My Spouse to My LLC?
Adding your spouse to your LLC can reach varying levels of complexity, depending on where you live and how many members are already a part of your LLC.
In short, you must do three things:
- Follow or amend the steps outlined in your operating agreement. If you don’t have an operating agreement, you will have to look to state laws which typically require the amending of the Articles of Organization with the Secretary of State.
- Create a record of the new owners, how much stake they own in the company, and how much money they are contributing to it
- File or change any related documents as required by your state
Your LLC’s operating agreement was made when you first created your LLC, and it may or may not have procedures outlined in it that decide the necessary steps in adding a new owner. If your operating agreement doesn’t have its own guidelines on this, the next place to look is in your state’s limited liability laws.
Adding Your Spouse to the Payroll
If you don’t want to add your spouse as an LLC owner, you can always add them as an employee instead. However, this has different ramifications for how the law and your state will treat your business. If you hire your spouse as an employee, they must receive the same benefits and follow the same rules as any other employee. That means no special treatment!
The benefits and drawbacks of treating your spouse as an employee are very similar. Aside from the risk of your relationship breaking down, the main obstacle for you will be putting your spouse on the payroll, withholding income taxes, paying payroll taxes (Social Security and Medicare), and potentially paying for their medical benefits and other related issues.
However, these things can also benefit your spouse (and you) in the same vein. Many of the costs for an employee can be written off as business expenses where, as a co-owner, they might not be. For example, while you will need to withhold your spouse’s income taxes from their paychecks if they’re an employee, they will not have to pay for unemployment insurance or self-employment tax.
In the end, whether you should add your spouse to your LLC or not is mostly situational; there’s no clear-cut yes or no answer. Adding your spouse to your LLC can make filing your taxes more convenient, but keeping your spouse as an employee can have a wide range of benefits, too.
The choice you make should come down to whether you can file as a single-member LLC in your state, whether it would benefit you and your spouse, and whether or not you are willing to take the risk of adding them as a co-owner of your LLC.