Owning a Business With Your Spouse
Learn About Business Types, Taxes, Location
UPDATE: Effective immediately, same-sex couples can legally marry in any state in the U.S. How does this affect spouses in business together? This article has been revised to include LGBTQ couples as spouses.
Working with family and friends is difficult. Working with a spouse in even more difficult. The personal relationship is often sacrificed to the business. But if you make some decisions and put things in writing before you begin, the chances of the marriage self-destructing are less.
Before You Start Into Business With Your Spouse
You have many decisions to make before you start your business. Because all of these decisions will affect the taxes you pay, both income taxes and self-employment taxes. In particular, before you decide on a legal form of business, read all of this article and talk to your tax advisor. This article and other information on this site are intended to be general information and are not intended to be tax or legal advice. Every situation is different, so talking to an advisor before you make decisions is important.
Owners or Owner/Employee
One of the first major decisions is whether you will both participate in running the business or if one of you will be an employee. Some questions to ask yourselves as you consider this decision: Do both spouses have expertise that is essential to the business? Will both of us have a major say in the business? Does one spouse have other outside commitments? Do both spouses have the ability to work in the business full-time?
If Both Spouses Are Owners
If you decide that both spouses are owners and will participate in running the business, your next decision is what business type you will form. To minimize your liability, you might select an LLC or a partnership, or even a corporation.
If One Spouse Is an Employee
If one spouse is an employee, it makes the tax situation a little less complicated. The owner-spouse can set up the business as a sole proprietorship or a single-member LLC with little paperwork involved. The employee spouse receives a paycheck, with federal income tax and FICA (Social Security/Medicare) tax withheld. The employee-spouse receives Social Security credit based on wages.
Income taxes will be based on the employee's salary and the profits of the business if it is a pass-through business such as an LLC or partnership. If the company is a corporation, both spouses are employees, so their employment income and income from dividends would be included in their taxes.
Get a Business Agreement in Writing
Finally, before you start your business, there is one thing you must do, to help your business succeed and to avoid your putting your marriage in jeopardy. In a two-spouse business, as in any business with two or more people involved, the most important thing you must do is "GET IT IN WRITING." If you don't put all your agreements in writing, in a partnership agreement or employment agreement, you may not be dooming your business, but you may be at risk of having your marriage fail.
Types of Agreements Between Spouses in Business Together
If you decide to go into a two-person business with your spouse, you should have a partnership agreement or LLC operating agreement. If you set up the business as a corporation, you will need corporate by-laws which serve as an agreement between owners.
For a shared ownership business, you should also have a separate buy-sell agreement prepared, in the event of divorce, the death of a spouse, or if one spouse wants to leave the business. A buy-sell agreement describes "what happens if..." multiple scenarios occur.
If one spouse is an employee, you may decide you want an employment agreement that describes the employee's pay and benefits and what happens if either party wants to terminate the employment relationship. The employment agreement should also include a confidentiality agreement, prohibiting the employee from disclosing confidential company information, and a non-compete agreement, prohibiting the employee from working in a competing business for a specific time and distance.
Qualified Joint Ventures
IRS regulations state if you and your spouse will be co-owners of your business, and your business is not a corporation, you may be able to take advantage of an IRS provision that allows two-spouse partnerships that meet certain requirements to file their business taxes as sole-proprietorship, using two Schedule C forms. If you decide to form a partnership, this provision might be something to consider, but if you are forming an LLC, it may not be available in your state. This option helps small two-spouse businesses because the Schedule C's are easier and less expensive to file than a partnership tax return.
Before you set up your legal form, inform yourself on qualified joint ventures, then talk to your tax advisor.