Husband and Wife LLC in a Non-Community Property State

A limited liability company, or LLC, is a popular business structure that offers liability protection to its owners. For married couples wanting to go into business together, forming an LLC is a common choice. In non-community property states, which follow common law, assets acquired by one spouse are owned solely by that person. This differs from community property states where assets acquired during marriage are generally considered jointly owned.

Spouses in non-community property states can form an LLC together, but the process involves making decisions about the company’s legal framework and how it will be treated for tax purposes.

Deciding on the LLC’s Legal Structure

When forming an LLC as a married couple in a non-community property state, the first decision is how to structure the ownership legally. The two primary paths are creating a multi-member LLC or a single-member LLC. Each structure has distinct implications for ownership, management, and personal liability, which are determined by state law before any federal tax considerations are made.

A multi-member LLC is a direct approach for joint ownership where both spouses are named as members in the formation documents. This gives both partners a legal ownership stake, which is often, but not always, divided equally. This structure formally recognizes the contributions and management authority of both individuals. The LLC’s liability shield protects the personal assets of both spouses from business debts and lawsuits.

Alternatively, a couple could establish a single-member LLC where only one spouse is the legal owner. The non-owner spouse can be involved as an employee or have no formal role. This structure simplifies decision-making, as there is only one official member. The LLC still provides a liability shield to the owner’s personal assets, but the non-owner spouse’s legal connection to the business is less defined, which could have implications for control and inheritance.

Choosing a Federal Tax Classification

After choosing a legal structure, a husband-and-wife LLC must choose how it will be taxed by the IRS. This decision is separate from its legal formation and dictates how the business reports income and pays taxes. The options depend on whether the LLC is a single-member or multi-member entity.

For a multi-member LLC in a non-community property state, the default tax classification is a partnership. This requires the LLC to file an annual informational return, Form 1065, reporting its income, deductions, gains, and losses. The LLC itself does not pay income tax; instead, profits or losses are “passed through” to the owners. Each spouse receives a Schedule K-1 detailing their share of the business’s financial results to report on their personal Form 1040.

An LLC can also elect to be taxed as an S corporation by filing Form 2553. Under this structure, owner-spouses must be paid a “reasonable salary” for their work, which is subject to payroll taxes. Any remaining profits can be distributed as dividends, which are not subject to self-employment taxes. This can result in tax savings but introduces more complexity, such as running payroll and filing Form 1120-S.

A less common choice is to be taxed as a C corporation, a structure often avoided by small businesses because of “double taxation.” The corporation pays income tax on its profits, and owners pay income tax again on any dividends they receive. While C corporations offer benefits for larger companies, they are not the most tax-efficient choice for a husband-and-wife LLC.

Required Formation and Governance Documents

Before an LLC officially exists, a couple must prepare several documents. These establish the LLC’s legal identity with the state and define the rules for how it will be owned and operated.

The first required document is the Articles of Organization. This is the official form filed with the state, usually through the Secretary of State’s office, to create the LLC. It includes the LLC’s name, principal business address, and the name and address of the registered agent—the person or entity designated to receive official legal and tax correspondence.

An operating agreement is a recommended internal document for a husband-and-wife LLC that outlines the ownership structure and operational rules. For a married couple, it is important that the agreement contains provisions for situations like death, disability, or divorce. A well-drafted agreement should include a buy-sell provision specifying what happens to a spouse’s ownership interest in these events to prevent disputes.

Most husband-and-wife LLCs will need an Employer Identification Number (EIN) from the IRS, which is a unique nine-digit tax ID for the business. An EIN is required for any LLC taxed as a partnership or corporation, and for any LLC that hires employees, including a non-owner spouse. The EIN is obtained by submitting Form SS-4 to the IRS.

Filing and Ongoing Compliance Procedures

Once the preparatory documents are complete, the next step is to file them and ensure the LLC remains in good standing. This involves submitting paperwork and adhering to ongoing state and federal requirements.

The first action is to submit the Articles of Organization to the designated state agency, usually the Secretary of State. This can be done online through the state’s business portal or by mail. Upon acceptance, the state provides a certificate of formation, officially recognizing the LLC.

Next, federal tax elections must be made. For an S corporation election, the couple must file Form 2553 with the IRS by the 15th day of the third month of the tax year for the election to be effective for that year.

To maintain its legal status, the business must comply with ongoing state requirements, which includes filing an annual report and paying an associated fee or franchise tax. These reports confirm or update information about the LLC, such as its address and registered agent. Failing to meet these annual deadlines can result in penalties or the administrative dissolution of the LLC.