This is a surprisingly common question, and the answer is usually no, your spouse should not be a co-owner of the LLC.
There are two main reasons people ask:
- Because the spouse is actively involved in the LLC
- More commonly, to ensure the spouse can manage or shut down the business if something happens to the owner
Tax consequences
Answering this question affects your taxes. If an LLC has only a single member (or owner), the IRS disregards the business and only taxes the owner, as if they were self employed. Self-employment tax is no fun, but it is easy to deal with. In addition, being a disregarded entity makes doing taxes easy.
If an LLC has multiple members (or owners) then the IRS no longer disregards the LLC. Instead, it is taxed as a partnership, a corporation, or an S corporation, though usually as a partnership. That means that each partner needs to receive and deal with a schedule K-1 (form 1065) with the IRS. This is not a huge deal, and partnerships have existed longer than the United States has been a country. The tax situation is common.
But common or not, being treated as a partnership is more complicated than being disregarded, so if you don’t have a very compelling reason, stay as a single owner LLC. Keep life simple.
My spouse is actively involved
That sounds like fun, good for you. You can still stay a single owner. Imagine this situation: Your business is wildly successful and you hire an amazing manager to run the business. She’s such a good manager that you retire to a sunny beach and let her run the business. Would you make her a co-owner? Maybe you would, but maybe not. It’s certainly not mandatory. You can have amazing employees who are not co-owners. Similarly, just because your spouse is actively involved does not mean that spouse needs to be a co-owner.
Instead, consider making the spouse a “manager” of the LLC. This is a special job title, similar to an officer of a corporation. It’s confusing, because an LLC may have one or more “managers” who are officers and other managers who manage people or processes, but are not officers.
The “manager” has authority to run the business and make business decisions on behalf of the owner, and you can have multiple managers.
At this point, you should probably call me to talk about your options. My team would love to share our business and legal counsel with you, and offer a 30 min low-cost Q&A session. You can find that at the bottom of our pricing page.
But the important thing to realize is that you have options. You can give your spouse almost complete authority to run the business without becoming an owner, which allows you to keep your precious “disregarded entity” status with the IRS.
What if I die?
Dying is kind of a big deal, and I suggest trying to delay that as much as possible. But because it can be a surprise, it’s good to plan for it.
An LLC will survive longer than its last owner. If you are the only owner of the LLC and you die, the LLC will continue long enough to be shut down gracefully. This becomes an estate planning issue, though. If your spouse has the authority to handle your final affairs, then your spouse will also have the authority to shut down your business or possibly even appoint a new owner. That new owner could be your spouse, your trusted employee, or a competitor, or whatever.
I worked with an estate planning attorney while in law school and saw first-hand what happens when people do not have an estate plan. Sometimes it’s not a mess, but usually, it’s a big hot steaming mess. I can help you make a will and succession plan for your business. But your LLC also needs an estate plan, and this is not part of your will.
Your Operating Agreement is Important
There are at least 99 reasons why your LLC needs an operating agreement, and the question of a spouse and LLC ownership is one of them. You should talk to a business attorney (like me) about what you want to happen if you cannot continue running your business.
The operating agreement is like a contract that decides how your business is run, and it can have definite instructions about what should happen when you die. The instructions I typically include give your estate the power to wind down the business, but these can be far more detailed.
If you want your spouse to become the owner in your absence, that’s no problem.
This is easier than converting your LLC from a single owner to having multiple owners, and at the same time, it does not change your tax status.
Summary
As a single member (owner) LLC, you are a disregarded entity by the IRS, keeping your taxes nice and simple. There are other ways to ensure your spouse can stay involved in the LLC or to handle the LLC if you die. Reach out to me about these options soon, because they’re usually preferable to changing your tax situation. Lastly, If you’re simply in the beginning stages of starting a business and need some tried and true business tips, you can learn a lot from my four simple steps to a solid business plan.
