Husband and wife LLC: qualified joint venture vs partnership

How is a spousal LLC taxed by default?

An LLC with two members is a partnership for federal tax, even if the two members are married. It files Form 1065 by March 15 and gives each spouse a Schedule K-1. Each spouse then reports their share on the joint Form 1040 and pays self-employment tax on it. See Form 1065 and single-member vs multi-member LLC.

The partnership return is due March 15 for calendar-year LLCs.

What is a qualified joint venture?

An election that lets a married couple who jointly own and run a business treat it as two sole proprietorships, each filing a Schedule C and Schedule SE, instead of a partnership return. To qualify, the spouses must be the only owners, both materially participate, file a joint return, and the business must not be held through a state-law entity such as an LLC. That last condition means most spousal LLCs cannot use it.

What about community property states?

In community property states, such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, an LLC owned only by spouses as community property can choose to be treated either as a partnership or as a disregarded single-member LLC. If treated as disregarded, its income goes on a Schedule C. The choice should be applied consistently.

How do the options compare?

How do you choose?

1. Check your state

   Community property or not.

2. Look at profit levels

   Higher profits may justify an S election. See when an S corp election saves tax.

3. Split the work fairly

   Allocations should reflect ownership and the operating agreement.

4. File consistently

   The IRS expects the same treatment year to year.

What if only one spouse works in the business?

A spouse who owns part of the LLC but does not work in it is still a member and receives a share of profit. Whether that share is subject to self-employment tax is not settled for LLC members who do not take part in management, so take advice. Many couples allocate guaranteed payments to the working spouse for their work, with remaining profit split by ownership. See guaranteed payments to partners.

What should the operating agreement say?

Each spouse's percentage, who manages the business, how profits and losses are allocated, and what happens on divorce or death. A clear agreement avoids disputes and supports the tax treatment you choose. See LLC operating agreement.

What if one spouse is a non-resident?

An LLC owned by a US person and a non-resident spouse is a partnership with a foreign partner. If it has income effectively connected with a US business, it may need to withhold on the foreign spouse's share. Couples can sometimes elect to treat a non-resident spouse as a US resident for joint filing, which changes this. See foreign-owned multi-member LLCs.

Why does the split matter for Social Security?

Self-employment tax builds Social Security credits for the spouse who pays it. If all profit is reported under one spouse, the other may build no credits of their own. A partnership or qualified joint venture splits the earnings between both.

This guide is general information. It is not tax or legal advice for your situation.