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 two 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 does not 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 marriage as being legal).
What US states are community property states?
There are 9 community property states in the US:
- New Mexico
- Texas (related: how to start an LLC in Texas)
What is community property?
Community property is property owned or shared between two 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 be any property that cannot 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 two 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 two options are:
Said another way, a husband and wife LLC cannot be taxed as a Sole Proprietorship in non-community property states. And the LLC cannot be a Single-Member LLC.