Can and/or Should a Husband and a Wife Form a Single Member Disregarded Entity
Estate Planning and Probate, Corporate Formation and Organization, Business and Commercial Law, Contract Law, Real Estate Law, General Practice
Specifically related to a limited liability company (“LLC”), what are the pros and cons of setting up the LLC as (i) a single member disregarded entity – i.e., husband and wife owning the membership interest(s) as joint tenants with right of survivorship; vs. (ii) a partnership – i.e., husband owning a 50% membership interest and wife owning a 50% membership interest? Most certainly when answering this question, consult with a tax professional, a legal professional, and the IRS.gov website where the IRS Tax Products Coordinating Committee has answered the underlying question.
Question: Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?
Answer: Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership unless the spouses elect to be treated as a qualified joint venture or, in a community property state. Rev. Proc. 2002-69 applies.
Requirements for a qualified joint venture:
- The husband and wife, who file a joint tax return, are the only members in the joint venture;
- The business is owned and operated by the spouses as co-owners (and not in the name of a state law entity such as an LLC or LLP);
- The husband and wife must each materially participate in the business; and
- Both spouses must elect qualified joint venture status on Form 1040 by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture and each spouse filing with the Form 1040 a separate Schedule C, C-EX, or Form 4835 accordingly, and, if required, a separate Schedule SE to pay self-employment tax.
Under specific circumstances, a partnership arrangement might make sense as follows:
- Separating the entity from husband and wife individually and filing a separate Form 1065;
- If there is ever separation/divorce, a partnership arrangement would make the separation/divorce easier;
- For purposes of estate planning, a 50/50 tenancy in common creates a balance between the husband’s and wife’s estates; and
- A 50/50 tenancy in common partnership allows the husband and wife individually to gift/ transfer membership interest(s) to their children, if any.
If you would like to discuss the above-referenced matter(s), please contact Jina today.
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