Plenty of small business owners wonder whether, for various reasons, it is a good idea to add their spouses as a co-owner (member) of their limited liability company (LLC). If you’re trying to find the answer to this question because you are thinking about starting a business yourself or recently married after owning an existing business, we’d like to offer some insight in this area.
Single-Member vs. Multi-Member LLC
LLCs appeal to business owners for many reasons — primarily because of its hybrid status. In other words, it combines the advantageous characteristics of sole proprietorships (pass-through taxation) and corporations (limited liability for owners). Owners of LLCs are referred to as “members.” LLCs are classified as either single-member or multi-member companies.
Multi-member LLCs are considered business partnerships in the eyes of the IRS; this means that a federal partnership tax return must be filed each year. For this reason, it’s generally better to leave off your spouse as a member of your LLC.
Qualified Joint Venture
In community property states, LLCs with multiple members may be treated as a disregarded entity (single-member) by the IRS. This means the LLC members do not have to file a partnership tax return they would otherwise have to submit as long as the only members are spouses. Additional requirements are:
- The spouses/members must file joint tax returns
- Both spouses must contribute “materially” to the operation of the LLC
- The LLC must not be taxed as a corporation
The IRS refers to LLCs owned by married couples as “qualified joint ventures.” If your spouse is not currently or does not anticipate becoming involved in running the LLC, it is generally best not to have him or her as a member.
LLC Ownership and Estate Planning
Some LLC members want to make sure that, if they pass away before their spouse, ownership of the company would transfer to their spouse. The better way to set up this arrangement is by explicitly stating in the LLC’s operating agreement that, upon the member’s death, the spouse will receive his or her interest in the LLC. If you have a Last Will and Testament, you may also bequeath your LLC to your spouse to add an extra layer of security.
Important note: Some states do not require LLCs to have an operating agreement, but we highly recommend creating one when you form an LLC.
Lockhart IP Helps Business Owners
Many entrepreneurs are genuinely surprised at the amount of seemingly insignificant matters that surface while they form their business. Plenty of LLC members want their spouses to be financially secure if something were to happen to them and believe that adding their spouse as a member is the most effective way to accomplish this. However, that may not be the case.
To help make sure your small business is set up properly, reach out to our team today to set up a consultation. We look forward to helping your company reach your loftiest goals!