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A husband and wife LLC will be taxed differently depending on the state where the LLC was formed.
How are husband and wife LLCs taxed?
It depends on the state where the husband and wife from the LLC.
If the LLC is formed in a non-community property state, the husband and wife LLC can only be taxed as a Partnership.
If the LLC is formed in a community property state, the husband and wife have 2 options:
- Partnership taxation
- Sole Proprietorship taxation (aka Qualified Joint Venture)
Partnership taxation for husband and wife LLCs
This is the default tax classification for Multi-Member LLCs.
This means the IRS treats the LLC as a Partnership for tax purposes.
The LLC needs to file a 1065 Partnership Return, which is an “informational return”. The LLC then issues K-1s to both spouses. This shows their share of the profits. From there, the spouses report their K-1s on their personal tax return.
Sole Proprietorship taxation for husband and wife LLCs
Alternatively, spouses can make a special election to have their LLC taxed as a Sole Proprietorship. This can only be done if the LLC is formed in a community property state (and the additional rules are met; see below).
This is more technically known by the IRS as a Qualified Joint Venture LLC. Said another way, a Qualified Joint Venture LLC is a:
- husband and wife LLC,
- that makes an election to be taxed as a Sole Proprietorship instead of Partnership, and
- is formed in a community property state.
Important: A husband and wife must file a joint tax return in order to be eligible for Qualified Joint Venture taxation.
Note: For federal tax purposes, the IRS recognizes all taxpayer marriages regardless of the spouses’ sex or gender, as long as their marriage is legally recognized under state law. This doesn’t include registered domestic partnerships, civil unions, and other similar relationships that aren’t recognized as a “marriage” by state law.
This means that married couples of any sex or gender may pursue a Qualified Joint Venture LLC in a community property state (if the state recognizes their union as being a legal marriage).
What US states are community property states?
There are 9 community property states in the US:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas (related: how to start an LLC in Texas)
- Washington
- Wisconsin
What is community property?
Community property is property owned or shared between 2 spouses.
Community property is generally defined as property that you, your spouse, or both come to own during your marriage (while your primary home is in a community property state).
It can also be separate property owned by either party before marriage or moving into a community property state that both of you agreed to convert into community property.
Additionally, it may include any property that can’t be clearly determined to belong to one spouse or the other.
Is an LLC community property?
An LLC is community property if:
- The LLC was formed in a community property state
- The 2 spouses are the only LLC Members
- Both spouses participate in the business, and
- The spouses file a joint return
Source: IRS: Revenue Procedure 2002-69
What can a husband and wife LLC do in a non-community property state?
Simply put, if a husband and wife LLC is in a non-community property state, they must form a Multi-Member LLC. And the LLC will be taxed as a Partnership by default.
Alternatively, they can elect to have their LLC taxed as a Corporation. The 2 options are:
Said another way, a husband and wife LLC can’t be taxed as a Sole Proprietorship in non-community property states. And the LLC can’t be a Single-Member LLC.
References
IRS: Publication 555
IRS: Married Couples in Business
IRS: Revenue Procedure 2002-69
IRS: Election for Married Couples Unincorporated Businesses
IRS: Can a married couple operate a business as a sole proprietorship or do they need to be a partnership
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
My husband moved from Wisconsin to state of Washington. In order not to pay child support and family court sanctions. He put his $1,000,000+ house in an LLC with only his new wife as ownership. He payed cash for the house. How can I get the Wisconsin court orders unforced? I am the father of Katie Flood, former wife.
I am sole member of a single member llc. I live in Washington State, which is a community
property state and I am getting a divorce.
Is my income/ profit community property?
Hi Kathryn, I’m not sure about this. I would check with a divorce attorney. Thank you for your understanding.
If my husband an I file as a single member llc in a community property state will we both get the social security benefits or will the social security just go to one of us?
Hi Mandi, with a Qualified Joint Venture LLC, both of you will get social security and Medicare benefits.
Thanks so much. We are in WA (community state). Can my wife and I co-own an LLC and take the S-Corp election for IRS or does it need to be single member only (e.g. as a member) to get S-Corp election? S-Corp in something is a must for tax purposes. Thanks.
Hi Rajiv, you can have an LLC taxed as an S-Corp for a Single-Member LLC or a Multi-Member LLC. Said another way, yes, you can.