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Married couples often work together to help each other in their business. In that case, forming a Limited Liability Company (LLC) is the best way to protect their business and personal assets. The process involves a few simple steps. It is required for every couple to follow legal steps before they start leading a business together. Spouses can form either a single-member LLC or they can be added to the LLC as members.
This article will guide you through the process of forming an LLC with your spouse. You will also know about tax and asset protection if you include your significant other in your LLC. There might be some state-specific guidelines that couples need to follow to establish their LLC.
Why Should Couples Start an LLC?
In many cases, married couples start joint ventures together. Among all the other business structures, having an LLC is the most beneficial one. The main reason for setting up an LLC is that the structure itself is less complicated and requires less paperwork than other forms of business.
The most important personal advantage of having an LLC with your spouse is trust. On the other side, the professional and financial benefit is the structure of the tax. It is inevitable that when a couple starts a business, the structure often they choose is a general partnership or other form. However, the tax structure in LLC is much simpler than any other form. Like, LLCs have pass-through taxation that saves the owners from double taxation.
Besides, if the LLC is established in a community property state then a single-member LLC will protect both husband and wife’s personal assets and they can enjoy the credits together. However, if the single-member LLC is established in the non-community property state then there will be only one owner and he/she will enjoy the credits and bear the liabilities.
Steps to Forming an LLC with Your Spouse
Now that you have a general understanding of why you should form an LLC with your spouse, let’s get into the specific details and steps involved in forming an LLC with your spouse.
Step 0: Select the State
Before you start proceeding with LLC formation, you must select the state you want your LLC to be established. In normal cases, you can pick any state to start your LLC. However, for LLCs with your spouse, you can select the state carefully. There are a few states that are community property states. According to the community property state law, any acquired property (or business) by one spouse should have an equal share of both spouses. There are 9 states in the USA that are considered to be community property states.
For the rest of the states, they are not considered as community property states. Hence, selecting those states for establishing your LLC might add some additional paperwork. Select your desirable state carefully from the list below to start your LLC with your spouse.
Step 1: Choose a Name for Your LLC
The first step in forming an LLC is selecting a name for your business. LLC names must comply with certain rules and restrictions. Your chosen name should:
- Be unique and distinguishable from other businesses registered in the state
- Not include certain restricted words (e.g., “Bank,” “Insurance,” or “Corporation”) unless you obtain prior approval
- Comply with any additional naming requirements specific to the state you’re starting your company in.
To check the availability of your desired name and reserve it, you can conduct a name reservation with the state SOS for a small fee. This will prevent others from registering the same name while you complete the formation process.
Step 2: Appoint a Registered Agent
Every LLC is required to have a registered agent, who is responsible for receiving and forwarding important legal and official documents on behalf of the business. Your registered agent must be a resident or a company authorized to operate as a registered agent in the state.
You can act as your own registered agent or appoint a professional registered agent service, which can provide added privacy and convenience. Spouses, friends, and other family members can also be registered agents. However, it is strongly recommended to appoint a professional registered agent for ease of work. We have a list of the best registered agents to explore and compare before you buy any service.
Step 3: File the Articles of Organization
The next step is to file the formation document (or the equivalent document) with the Secretary of State in the state. The formation document has different names in different states. This document officially creates your LLC and establishes its existence in the state.
The formation document typically requires the following information:
- LLC name
- Principal office address
- Registered agent name and address
- Members’ names
- Nature of the business
- Any additional provisions or information required by the state
Filing your formation document for an LLC with your spouse does not need any additional steps. However, for a married couple, it is required to check with the state rules as Community Property States have different rules than non-community property states.
Filing an LLC is easy but it requires a bunch of paperwork. It is wise to appoint an LLC formation service for that. We recommend ZenBusiness as it offers LLC formation at $0.
– LLCBuddy Editorial Team
Step 4: Create an Operating Agreement
For a couple’s LLC (whether single-member or multi-member) it is recommended to have an operating agreement even if it is not mandatory in your state. An operating agreement is an internal document that records the in-and-out of your organization. From the company structure to the capital contribution of the members, everything is written in the operating agreement. Hence, for a married couple, it is suggested to have this document for transparency and future partnership.
This document outlines the rules and regulations that govern the internal operations of your business, including:
- Ownership structure and members’ rights and responsibilities
- Management and decision-making processes
- Distribution of profits and losses
- Procedures for adding or removing members
- Dissolution and exit strategies
Having a comprehensive Operating Agreement can help prevent disputes and misunderstandings between you and your spouse, especially in the event of a disagreement or if one of you wishes to leave the business.
Step 5: Obtain an Employer Identification Number (EIN)
Even if you don’t plan to have employees initially, you must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number is used for tax identification purposes and is necessary for opening a business bank account, hiring employees, and filing tax returns.
You can apply for an EIN online through the IRS website or by mail or fax using Form SS-4. There are three ways you can apply for EIN. You can apply online, by mail, or by Fax. International people can apply for EIN via phone call. With some LLC formation services, getting EIN comes with their premium packages.
After Forming an LLC with Your Spouse
Once you are done with all the steps mentioned above, your LLC with your spouse will be established. However, there are other requirements to follow. These additional steps are general steps that are required for any other form of business.
Comply with State and Local Requirements
Depending on the nature of your business and the location where you’ll be operating, you may need to comply with additional state and local requirements. These can include:
- Obtaining business licenses and permits
- Registering for state and local taxes (e.g., sales tax, income tax, payroll tax)
- Obtaining zoning and land-use approvals
- Adhering to industry-specific regulations
Be sure to research the specific requirements for your business and your local jurisdiction. Different states may or may not have different licensing policies based on the nature of your business. Make sure to check the requirements before setting up your business.
Open a Business Bank Account
The next step is to open a business bank account in the state. Business bank accounts and business credit cards are the best ways to separate personal and professional transactions. For a couple, a joint account would be an ideal decision. It’s important to keep your personal and business finances separate to maintain the liability protection of your LLC.
Obtain Necessary Licenses and Permits
Depending on the type of business you plan to operate, you may need to obtain various licenses and permits at the state and local levels. Some common licenses and permits include:
- State general licenses
- State privilege licenses
- Occupational licenses or certifications
- Sales tax permit
- Zoning and land-use permits
Check with the state license office and your local government offices to determine the specific licenses and permits required for your business.
Ongoing Maintenance and Compliance
Once your LLC is formed, there are ongoing responsibilities and requirements to maintain its compliance and good standing. These may include:
- Filing an annual report and paying the associated fees
- Keeping accurate financial records and holding regular meetings (if required)
- Maintaining any necessary licenses and permits
- Paying state and federal taxes
- Updating the LLC’s information with the state if any changes occur (e.g., address change, membership changes)
Tax and Legal Implications for LLC with Spouse
Forming an LLC with your spouse can have tax and legal implications that you should consider. As we already mentioned about the community property state, if the LLC is located in such a state, then the tax structure will be different from other states. In community property states, the tax structure is much simpler than that in non-community property states. Here are a few key points to note:
Tax Implications
- If you’re in a non-community property state, your LLC can be taxed as partnerships, corporations, or sole proprietorships (if you are the sole owner).
- If you choose to be taxed as a partnership, both you and your spouse will need to report your respective shares of income, gains, losses, deductions, and credits on your individual tax returns.
- If you live in a community property state, you may be eligible to file as a single-member LLC (also known as a “qualified joint venture”) for federal tax purposes, which can simplify your tax filing requirements.
Legal Implications
- In the event of a separation or divorce, the ownership and management of the LLC will need to be addressed. It’s crucial to have provisions outlined in your Operating Agreement to handle such situations.
- If you live in a community property state, your spouse may automatically have an ownership interest in the LLC, even if they are not listed as a member.
- Consult with a legal professional to ensure you understand the legal implications of forming an LLC with your spouse in the state your LLC is located in.
Advantages of Forming an LLC with Your Spouse
- Trust: When you trust your partner personally, it will reflect on your professional life as well. No one other than your spouse can be your best professional partner when it comes to trust.
- Personal Liability Protection: LLCs protect your personal assets. Hence, having an LLC together protects both of your personal assets. However, if only one partner is an owner and the spouse is considered an employee, then for the company debt, your spouse can be responsible for personal liabilities.
- Shared Ownership and Management: By forming an LLC with your spouse, you both have an equal say in the management and decision-making processes of the business. This can foster a sense of partnership and shared responsibility.
- Credibility and Professionalism: Establishing an LLC can lend credibility and a professional image to your business, which can be beneficial when dealing with clients, vendors, and lenders.
Potential Drawbacks of Forming an LLC with Your Spouse
- Complexity: Forming an LLC with your spouse can be more complex than operating as a sole proprietorship or general partnership, as there are additional legal and administrative requirements.
- Ongoing Maintenance: LLCs require ongoing maintenance, such as filing annual reports and paying annual fees, which can add to the administrative burden and expenses.
- Potential for Conflict: Working closely with your spouse in a business setting can sometimes lead to conflicts or disagreements, which can strain the personal relationship if not managed properly.
- Dissolution Considerations: In the event of a separation or divorce, the dissolution of the LLC can become complicated, especially if there are no provisions outlined in the operating agreement.
Despite these potential drawbacks, many couples find that the advantages of forming an LLC with their spouse outweigh the challenges, especially when proper planning and communication are in place.
F.A.Q.
In an LLC, ownership and management structures are highly flexible. You can choose to be equal partners with shared responsibilities, or you can allocate ownership and management roles based on each spouse’s skills, contributions, or preferences. It’s crucial to discuss and document these arrangements in your operating agreement to avoid misunderstandings in the future.
When you form an LLC with your spouse, you have several options for how you’ll be taxed. By default, the IRS treats LLCs with two or more members as partnerships, where profits and losses pass through to the individual members’ tax returns. However, you can also elect to be taxed as a corporation, which might be beneficial depending on your specific financial situation and business goals. Consulting with a tax professional can help you determine the most advantageous tax treatment for your LLC.
The primary legal document you’ll need to create is the operating agreement, which outlines the ownership structure, management responsibilities, decision-making processes, and other key provisions of your LLC. Additionally, you’ll need to file articles of organization with your state’s business registrar to officially register your LLC. Depending on your location and business activities, you may also need to obtain licenses, permits, or other regulatory approvals.
Disagreements are a common occurrence in any business, and it’s essential to have a plan in place for resolving them effectively. Your operating agreement should include provisions for dispute resolution, such as mediation or arbitration, to help you navigate conflicts constructively. Additionally, maintaining open communication and a spirit of collaboration with your spouse can help prevent disagreements from escalating.
Divorce can have significant implications for a jointly owned LLC, potentially affecting ownership interests, management responsibilities, and the overall operation of the business. To protect your business interests in the event of divorce, it’s essential to address these issues proactively in your operating agreement or through a prenuptial or postnuptial agreement. Depending on the circumstances, you may need to negotiate a buyout or other arrangements to ensure the continued viability of the business.
Yes, you can typically add new members to your LLC at any time with the consent of the existing members. However, it’s essential to consider how new members might impact the ownership structure, decision-making processes, and overall dynamics of the business. You’ll need to amend your operating agreement and update any necessary legal documents to reflect the changes in membership.
One of the primary advantages of operating as an LLC is the limited liability protection it provides to its owners, also known as members. This means that your personal assets are generally shielded from the liabilities of the business, such as debts, lawsuits, or other financial obligations. However, it’s important to maintain proper corporate formalities and avoid commingling personal and business assets to preserve this protection.
The allocation of profits and losses in an LLC can be customized to reflect each member’s contributions, whether financial, operational, or otherwise. Your operating agreement should specify how profits and losses will be distributed among the members, taking into account factors such as capital contributions, time and effort invested, and any special skills or expertise brought to the business. By clearly defining these terms upfront, you can minimize misunderstandings and disputes down the road.
Community property laws vary by state but generally govern how assets and liabilities are divided between spouses in the event of divorce or death. If you live in a community property state, any assets acquired during the marriage, including interests in an LLC, may be considered community property and subject to division between you and your spouse. To protect your business interests, you may need to take additional steps, such as executing a marital agreement or structuring your LLC in a way that minimizes exposure to community property laws.
Planning for the long-term success of your LLC is essential, particularly if you and your spouse are the primary owners and operators of the business. In your operating agreement, you should address issues such as what will happen to the business in the event of incapacity, retirement, or death of one or both spouses. This may involve establishing buy-sell agreements, naming successor members or managers, or outlining procedures for selling or transferring ownership interests. By proactively addressing these issues, you can ensure a smooth transition and protect the legacy of your business for future generations.
In Conclusion
Spouses often help their significant other in their business. Now, you can do that either unofficially or officially. If it is official and you are regularly not only working but also drawing money from your company’s revenue, then registering it as an LLC would be the best option. If it is a community property state then it is easier to register your LLC and follow the tax structure. However, if it is located in a non-community property state, then it will be a bit complicated.
Anyhow, having an LLC with your spouse requires a few steps to follow that are explained above in this article. As we mentioned, registering an LLC and filing tax in such cases can be a bit complicated, it is recommended to hire a professional LLC formation service, such as ZenBusiness. It not only offers LLC formation at $0 but also offers tax consultation.
Like any other partnership, having your spouse beside you professionally requires paperwork. Remember, registering a business does not value romance, but transparent legal papers. Hence, before you jump into this pool of happiness, make sure to have a proper plan, discussion, and strong foundation to start your limited liability company.