We recently spoke to a new business owner (not a client) and he told us that he had formed a single member LLC (SMLLC) that was owned by him and his spouse. We informed him that a “single” member LLC means exactly that, it has a single owner. Thus, he and his wife could not be joint owners. When we inquired if he had filed a partnership return, he responded that he had filed his business return on Schedule C of Form 1040. And he assured us that everything was done correctly because he had hired an attorney to form the LLC.
Since curiosity got the better of us, we researched his LLC on the PA Dept. of State website and saw that he and his wife were organizers for the LLC. While a single-member LLC can have multiple organizers, it can only have a single owner. When we shared this with the business owner, he said that he was fairly certain that he and his wife were owners, thus perhaps they were a partnership. Unfortunately, this scenario is not atypical as many business owners do not understand their business structure.
We also recently read a discussion between CPAs as to whether a husband (H) and wife (W) can be joint owners of an LLC. There were some who believed it was doable, others disagreed. Thus, there are CPAs and likely other professionals who do not understand the tax rules regarding LLCs and spousal ownership.
The rules are quite clear. If you have a SMLLC, it can only have one owner. By default, it is classified as a sole proprietorship by the IRS. The SMLLC, if it desires, can request to be treated as a C Corporation or an S Corporation.
If there are two or more members, a multi-member LLC (MMLLC) is formed. By default, a MMLLC is classified as a partnership by the IRS. The MMLLC, if it desires, can request to be treated as a C Corporation or an S Corporation.
Let’s look at the creation of a business by a husband (H) and wife (W). If a H and W wish to go into business together, they can form what is called a “Qualified Joint Venture” (QJV). A QJV is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a husband and wife who file a joint tax return; (2) both spouses materially participate in the trade or business; and (3) both spouses elect not to be treated as a partnership. A QJV must be a business owned and operated by spouses as co-owners, and not in the name of a state law entity such as an LLC. This is the one requirement of a QJV that some persons mistakenly overlook when they think that a H and W can own a SMLLC.
When the husband and wife file their personal tax return on Form 1040 claiming QJV status, each of them must include a separate Sch. C showing their respective ownership in the QJV. There is no requirement that it be a 50/50 co-ownership.
There are special rules for community property states, and those rules are not reflected herein.
Why would a H & W elect to be treated as a QJV? Reasons could include that since both spouses will be working in the business, they each want to have earnings for social security purposes and perhaps wish to set up a separate retirement plan. If one spouse were to form a SMLLC and hire the other spouse as an employee, there would be payroll processing costs. The QJV eliminates the need for a payroll. If a person is considering creating a QJV, they must also consider the fact that their business is not asset protected which an LLC does provide.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, including how to adopt an age-weighted profit-sharing plan, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.