Should my spouse co-own my limited liability company?

A common question asked by new married business owners is whether the spouse of the business owner should own an interest in the new limited liability company. And this is a great question.

I think, as a practical matter, you probably want to let personal feelings and marital health drive this decision. Telling your spouse--who is probably working hard to support you in the business--that you will be 100% owner of a new venture is probably not good marriage management. (Full disclosure: I’ve been married only once, am still married and I’m coming up on my 27th anniversary.)

However, while I am all for doing things that makes your husband or your wife happy, you should know this: Deciding to make your spouse the co-owner of your limited liability company may create some minor tax accounting headaches for you. And here’s why. An LLC owned by more than one person--a husband and wife, say--by default gets treated as a partnership for tax accounting purposes.

And that means the limited liability company will need to file a partnership tax return with the Internal Revenue Service and maybe also a partnership tax return with the equivalent state revenue agency. Filing a partnership tax return isn’t that big a deal… but partnership status does mean the expense and hassle of another tax return.

Let me also make this clarification, just so there’s not confusion. If you or your spouse operate a small business as a one-owner limited liability company, you don’t need to do anything particularly complicated to file your business limited liability company taxes. You just add a Schedule C form to your regular 1040 individual tax return.

Similarly, if you or your spouse own real estate through a one-owner limited liability company, you also don’t need to do anything complicated to file the real estate investment’s taxes. You just add a Schedule E form to your regular 1040 tax return.

Clearly, then, a hidden cost to bringing your wife or husband into your business or investment LLC is that you need to prepare or more likely need to pay some accountant to prepare a partnership tax return.

Let me make two qualifications here, however: First, if you and your spouse reside in a community property state and you guys own a two-member LLC, you may elect to treat your two-member LLC as a disregarded entity. This means you won’t have to treat the husband-and-wife limited liability company as a partnership. As mentioned in the preceding paragraphs, you’ll just report the limited liability company’s income and deductions on a Schedule C or on a Schedule E inside your individual 1040 tax return.

And here’s a second qualification about the “extra cost” of husband-and-wife limited liability companies. While most of the time treating a husband and wife LLC as a partnership just complicates and increases the costs of your tax accounting, in one special case partnership tax treatment saves you big money. Specifically, if a husband and wife treat a co-owned LLC which operates an active trade or business as partnership and one spouse works in a high wage job where he or she pays the maximum Social Security tax, a partnership tax return may save the family self-employment taxes. This occurs (or may occur) because any share of the partnership profit that’s assigned to that “employed-elsewhere” spouse won’t be subject to any Social Security taxes—only Medicare taxes.

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