You've chosen a life partner and are married. You may be asking yourself, is it wise to make my spouse my business partner? The answer could be yes. You would want to be sure to have a game plan in place. Good communication would also be necessary to balance the commitments of your marriage and business. Real estate investing as a married couple can be a very rewarding and lucrative endeavor.
In this article, we discuss:
- Benefits of owning a family business
- Steps before starting a business with your spouse
- Actions to determine how to run your business
- Options for structuring your business
- Tax considerations
Keep reading to develop a solid plan that safeguards your marriage and business.
Benefits of Real Estate Investing as a Married Couple
First, let's talk about why operating a business that involves real estate investing as a married couple is a good idea:
- Shared goals
- Peace mind
You and your spouse will share financial goals in your business. For instance, there will not be interoffice politics to navigate, and you will both work to secure your financial freedom.
Working with someone you trust, like your spouse, there is also peace of mind. Since you trust your spouse, the business will benefit from your stability and commitment to your marriage and the company.
Before You Start Real Estate Investing as a Married Couple
Before you dive into a real estate business with your spouse, you should discuss:
- How (or if) you will incorporate your business?
- Who will be the owner of the business?
- Who will manage the business?
After you answer these questions with your spouse, make sure to write your decisions down. Having these agreements in writing protects both of you in the event of:
- Surrender of the business
No one wants to think about the bad things that can happen in a marriage, but those adverse events have ramifications for your business. That's why it's essential to have plans "just in case" different types of scenarios occur.
Options for Running Your Real Estate Investing Business as a Married Couple
In general, the IRS allows for four different types of business structures:
- Sole proprietorship
- Limited Liability Company (LLC)
Did you decide that only one spouse will be an owner? You might choose to create a sole proprietorship or a single-member LLC.
Are both you and your spouse going to be owners? You will most likely choose either a partnership, LLC, or a corporation.
The following conditions must be met to be a sole proprietorship:
- No other employees are active in the business, including but not limited to children and other relatives
- Both spouses must materially participate in running the business
Taxes on a sole proprietorship, each spouse must file:
- Schedule C reporting their share of the business' income
- An additional (and separate) self-employment tax form
- Employee spouse receives a paycheck with federal income tax and FICA withheld
Considerations for running your business as a sole proprietorship:
- Easiest to establish
- Generally, one spouse is an "employee," and the other is the "owner"
- You and your spouse are 100% liable if the business fails
- No protection from creditors
If you want more detailed information about this business structure, check out our article, "Can My Husband And I Own Our Business Together As A Sole Proprietorship?"
Typically a partnership:
- Organizes the company so that both you and your spouse share the profits and losses
- Formed via a written agreement between two or more parties
- Must register in all states where it does business
- Both spouses are owners
Taxes on a partnership:
- Only one form is involved, so it's a little easier to file taxes
- Requires your to obtain a tax ID number
- May be subject to state and federal regulations and tax
- "Pass-through" income means that the owner's share of the business income goes on to your income tax return
- Must pay self-employment tax
Considerations for running your business as a partnership:
- Has opportunities for growth
- Multiple types of partnerships (GP, LP, LLP) give your business flexibility
Read up on how a Limited Partnership can structure your real estate and other business deals in "Limited Partnership for Real Estate Investors" to see if this structure will work for you.
Limited Liability Corporation (LLC)
You will want to check your Secretary of State web page for more details, but in general, to form an LLC:
- Name your business
- Register with your state and pay a fee
- Designate an agent
- The agent will receive legal notices on behalf of you and your spouse
- Both spouses are owners
Taxes on an LLC:
- Taxes based on your salary and profit from business
- If you set up as a sole proprietor and an employee, you will pay income and FICA
- Partnership--LLC does not file taxes–you pay personally on income
- If you set up as a C corporation, your corporation files taxes, and you file taxes
- If you set an S corporation, LLC reports income sent to you as owners, you have to report the payment but do not pay self-employment tax
Considerations for running your business as an LLC:
- Enables you and your spouse to share money and other resources
- Protects you from being sued directly
- Shields both you and your spouse's personal assets from lawsuits
- Need management plan for "what if" scenarios
If you want to learn more about how LLCs protect you, your spouse, and your assets, read "What Are The Different LLC Types USe By Real Estate Investors?"
This business structure is a separate entity from either your or your spouse. In general, a corporation:
- Each spouse is a shareholder who divides the ownership shares of the company
- Individuals have invested money in the business
- Incorporation can be complicated
- Payout in dividends based on level of investment
Taxes on a corporation:
- If you set up as a C Corporation, your corporation files taxes, and you file taxes (double taxation)
- If you set an S Corporation, LLC reports income but is sent to you as owners, you have to report the payment, but do not pay self-employment tax
Considerations for running your business as a corporation:
- Taxation is more complex
- S Corporations have "Pass-through" income which means that you must include your owner's share of the business income on your income tax return
- You may qualify for a qualified joint venture
Real estate investing as a married couple can be a massive advantage for both of you. You can secure your financial future together and reduce your tax burden. However, it's essential to know how to maximize your savings as a real estate investor.
For more information about how to keep more of your hard-earned money, read the following articles:
- When to File Taxes Separately As a Married Real Estate Investor
- Using Your Family's Tax Brackets to Reduce Your Tax Burden
Consider attending our FREE weekly group mentoring calls if you are just starting with real estate investing as a married couple. During these calls, we discuss topics such as: how to best structure your business, how to protect your assets, what tax savings you can take advantage of, and more. Join us for Royal Investing, Wednesdays at 12:30 p.m. EST by Registering Today.