You live together, you work together, you may even have children together. But does being partners in life automatically make you partners in business?
One of the most common questions I get regarding Limited Liability Company (LLCs): Are spouses are considered partners?
Most business owners are familiar with LLCs. They are the most popular type of business entity due in part to the protection they provide owners from personal liability. The two main types of LLCs including the following:
- Single-Member LLC: Under this model, one owner has full control of the business, acting as both its LLC member and manager. The LLC is disregarded by the IRS, meaning the owner of the business is treated as a sole proprietor and can elect to pay taxes on his or her personal returns.
- Multi-Member LLC: This type of entity has two or more owners who share control of the company. The members must decide whether they want to be managed by their members or by a manager. By default, they will be taxed by the IRS as a partnership. However, in some cases, the business can be taxed as a sole proprietorship — if the owners are a married couple.
That said, there are specific conditions that must be met for a multi-member LLC owned by a married couple to be taxed as a sole proprietorship. Most importantly, the LLC must be formed in a community property state. These are states where spouses jointly own all shared assets acquired during their marriage, regardless of which spouse acquired them. These assets include income, properties, household items, debt, and financial interests in business. Currently, nine states recognize community property:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
In these states, LLCs that are wholly owned and operated by a married couple can elect to be treated as a single-member LLC and therefore a disregarded entity. This simplifies the filing process, as no separate tax return is required. Rather, profits and losses are reported on personal tax returns and the couple must file jointly.
It should be noted that for federal tax purposes, married couples include same-sex couples. Therefore, these rules apply to both. However, they do not apply to registered domestic partners, those in civil unions, or other partnerships that aren’t considered marriage under state law. As a reminder, all 50 states recognize same-sex marriages.
LLCs in Non-Community Property States
In all other states, multi-member LLCs, even those owned and operated by married couples, are treated as partnerships by default. This means each member of the business entity reports his or her profits and losses on separate tax returns. LLC members filing partnership returns typically pay income and self-employment tax on their share of partnership earnings.
LLCs Taxed as S Corporations
By default, LLCs are pass-through entities, meaning their profits pass directly to their owner’s personal income tax returns and they pay income and self-employment taxes on those profits. However, LLCs can elect to be taxed as S Corporations. The benefit to this is that only the income paid to LLC members through payroll is subject to self-employment tax and profits are not subject to Social Security or Medicare taxes. This can result in tax savings. The downside is that managing payroll and filing taxes may be a bit more complex. It should be noted that the deadline for electing S Corp status is Monday, March 17, 2025 for businesses whose tax year began on Jan. 1, 2025.
For more information on electing to file as an S Corporation, you can watch this webinar: S Corporation Election Considerations for Corporations and LLCs.
Elect the Right Status for Your Business
Just like a marriage, there are pros and cons to every decision made in business. For couples who own an LLC in a community property state, choosing to be treated as a single-member LLC rather than a partnership has many benefits. I recommend consulting with your tax professional before taking any action to ensure you’re doing the right thing for both your business and personal finances.
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