LLCs Co-Owned by Spouses in Community Property States

An LLC co-owned by spouses in a community property state can be treated like an SMLLC for tax purposes.



From almost every perspective, it’s accurate to say that a single-member limited liability company (SMLLC) has only one member. After all, that’s why it’s called a single-member LLC. However, in community property states, you can have an SMLLC with not one but two members—or at least have a two-member LLC that’s treated like an SMLLC for tax purposes.

If you’re married, you probably know if you live in one of the nine current (2014) community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. These states have laws stating that property acquired by a married individual is owned in common with that individual’s spouse. Those laws can extend to profits from an LLC owned solely by two people married to each other.

The IRS has issued a special rule applicable to LLCs owned by married couples who live in community property states. Under this rule, a married couple can treat their jointly owned business as a disregarded entity for federal tax purposes if:

  • the LLC is wholly owned by the husband and wife as community property under state law
  • no one else would be considered an owner for federal tax purposes, and
  • the business is not otherwise treated as a corporation under federal law.

In most cases, this would mean that the spouses would file a joint tax return (with the general tax savings that come with such a return), and include with that return a Schedule C, and any other relevant schedules (Schedule SE, Schedule E, and so on), for their business. For all practical (tax) purposes, they would prepare their taxes as though their LLC were an SMLLC. This includes same-sex couples who are legally married under state law.

If a married couple does not meet the requirements of the IRS special rule, then their jointly-owned LLC would be treated like any other multi-member LLC which means it would be taxed as a partnership, not as a disregarded entity. As a partnership, an LLC has additional tax reporting requirements that don’t apply to a disregarded entity, such as filing a partnership tax return.

Finally, keep in mind that if you choose to form your business as an SMLLC, with yourself as the sole company member, but then have your spouse do work for that business, it will be important to keep clear records showing your spouse’s status. Depending on the circumstances, your spouse could variously be considered an employee, an independent contractor, or—in spite of not officially appearing in an operating agreement as such—an additional LLC member. These different possibilities each have their own implications regarding tax obligations and potential liability.

If you have other questions about spousal LLCs, check irs.gov. For other general questions about taxation of SMLLCs, check out the other tax-related articles in the SMLLC section of this website or consult with a tax professional.

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