There are some cases where a couple who run a business together wouldn’t be interested in creating a formal business entity.
The question then becomes: can that business, being run by a married couple, be considered a sole proprietorship?
The answer is yes. The IRS allows a lone exemption for married couples who want to structure their business as a sole proprietorship.
Before going into details on that, there are typically four different kinds of business structures that the IRS recognizes. Those include:
In order for the business you run with your spouse to qualify as a sole proprietorship, the following conditions must be met:
With those requirements met, each spouse would be required to file their own Schedule C, reporting their individual share (usually an even split) of the business’s income. Each spouse in the husband-and-wife business (sole proprietor or partnership or other) would also need to file a separate self-employment tax form.
This, of course, is a separate issue entirely. The big advantage of a sole proprietorship is that it’s one of the easiest business structures to establish. The major disadvantage of this structure is that you and your spouse are 100% liable if the business fails. Sole proprietorships offer no protection from creditors.
Another option that many married couples employ is a partnership. For tax purposes, it can be easier to file since there is only one form involved. On the other hand, the business will be required to obtain a tax identification number. Partnerships might also be subject to state and federal regulations. The major upside, however, is that partnerships offer more opportunities for growth.
There are no regulations that state that if you start a business as a joint venture LLC, which for tax purposes is considered a sole proprietorship, you cannot later change the structure of the business to a partnership, LLC, or anything else. For many married couples, having the option to start as a sole proprietorship affords them the opportunity to hit the ground running. It’s a simple and effective means of getting their business started without needing to file numerous petitions with state and federal agencies.
What makes sense for your business in the early days, however, may not make sense down the road.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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