The 9 Community Property States for a Husband and Wife LLC

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.

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:

• 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 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:

• LLC taxed as an S-Corporation
• LLC taxed as a C-Corporation

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.

Matt Horwitz

Founder & Educator, LLC University®

Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
 
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.