What to Do When Your Business Partner Is Your Life Partner

What to Do When Your Business Partner Is Your Life Partner

If you are going into business and your spouse will help, you don’t need to hire them or form an LLC or corporation. By following certain guidelines, you can continue as a sole proprietorship.

Filing a joint return

To maintain sole-owner status with your spouse’s participation in your business, file a joint tax return at the end of the year. On the joint return, list all business income on Schedule C. The IRS then treats the business income as belonging to both of you, resulting in one tax bill. It is common for mom and pop businesses to operate this way.

Filing a joint return allows you and your spouse to own a business without forming a partnership or dealing with more complicated partnership taxes. It also allows your spouse to provide services without being classified as an employee, saving on payroll taxes. This setup not only saves money but also reduces record keeping if there are no other employees.

When using a joint tax return, your business still has one formal owner for IRS purposes, listed on Schedule C and the business registration forms. However, in most states, marital property laws give your spouse a share in your business.

Filing separate tax returns

If you and your spouse file separate tax returns, your spouse can still participate in your sole proprietorship by doing volunteer work without pay. Note that volunteers do not receive credit in their Social Security accounts for unpaid work.

Choosing equal ownership

If both you and your spouse want formal ownership of the company, with equal management say and distinct shares of profits and losses, create a business structure that allows two formal owners (e.g. partnership, LLC, or corporation). This will require filing more complex tax returns and business paperwork.

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