Deciding on a structure for your business is no small task. Each option has advantages and drawbacks, and the right choice for you depends on your circumstances and goals. A limited liability company is one of the simplest structures offering legal protection and financial benefits.
If you form an LLC, you must decide who counts as an owner. For married couples, choosing to add a spouse isn’t always as straightforward as you would think. Let’s review the pros and cons of adding a spouse to an LLC.
Considering Your Circumstances Before Weighing the Pros and Cons of Adding a Spouse to an LLC
It pays to examine your circumstances before determining whether including your significant other in this venture is right for you. Several factors can impact your choices and which side you eventually fall on when making your final decision.
Have You Already Formed the Business?
Whether your business is already up and running or you are in the process of launching a new venture might impact the weight you give to the benefits and drawbacks. If you’ve run your business independently for years, your emotional reaction to adding your spouse and losing some control might affect your decision more than if this is a brand-new operation.
Does Your Spouse Play a Significant Role in Running the Business?
Another consideration that could impact both your options and your perceptions of the pros and cons of adding a spouse to an LLC is the role your significant other plays in the business. For example, if your spouse has or will have a substantial role in running the company, you can add them to the LLC or put them on the payroll. Forming a limited partnership is another alternative.
How Stable Is Your Relationship?
At AmeriEstate, we know this is a bit of a sticky topic, but it’s also an important one. If your marriage is new, bringing in your partner might seem exciting. However, you should consider the potential implications to your business if things don’t work out. Likewise, even though all relationships have ups and downs, if yours has more of the latter, you might need to view the pros and cons of adding a spouse to an LLC differently.
What State Do You Live In?
While you can form an LLC with your spouse in all 50 states, a few states have an additional tax benefit. The Internal Revenue Service allows spouses who are joint LLC owners to file as a single-owner LLC. In 2023, the following nine states have community property laws:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
The laws also apply to domestic partners in California, Nevada and Washington.
Identifying the Benefits of Adding a Spouse to an LLC
After examining the specifics of your situation, you can start factoring the pros and cons of adding a spouse to an LLC into your decision. Let’s begin with the positives.
Retirement Benefits
As an LLC, you can establish a Solo 401(k) if you don’t have any full-time employees. Typically, contribution limits for single-owner limited liability companies are higher than for multi-owner LLCs. However, the IRS allows you to use the single-owner contribution limits when that multi-owner LLC is a spousal team.
Succession Benefits
Including your spouse in your LLC can make succession planning and transitioning more manageable. Business succession upon an owner’s death varies from state to state. However, if you own the business with your spouse, your spouse is usually your heir and your share of the company would be passed on to them. Furthermore, they will be better prepared for the transition if they are already involved in running the company.
Legal Benefits
When weighing the pros and cons of adding a spouse to an LLC, the legal implications usually fall on the pro side. One of the benefits of forming a limited liability company in the first place is that your personal assets have a higher level of legal protection in claims against the LLC. However, if there is a claim against your business, the creditor’s ability to collect in a charging order is lower because the income for two members — instead of just one — is off-limits.
Operational Benefits
Let’s face it: Sometimes having another person help manage the many tasks and responsibilities involved in running a business is appealing. If you and your spouse enjoy working together, have similar ideas about running the company, and develop a plan for handling disagreements, then including them in your business might be a significant operational perk.
Understanding the Drawbacks of Adding a Spouse to an LLC
Before making your final decision, it is important to consider both the advantages and disadvantages of adding a spouse to an LLC. While there are numerous benefits, there are also drawbacks that need to be taken into account. Consider the following before making your final decision:
- Tax payments: With two people earning money from the business, you will both be responsible for paying federal and state income taxes on the company’s profits, as well as Social Security and Medicare self-employment taxes.
- Tax filing: Unless you live in a community property state and qualify for the single-member LLC status, you will have more work to do come tax time. If you don’t qualify, the IRS considers the LLC a partnership, and you must file partnership tax returns.
- Paperwork increase: Adding your spouse to your LLC leads to more paperwork when starting the business, as the Operating Agreement requires more sections related to joint control.
- Shared control: A final downside for many is sharing control of all aspects of the business with another person, even if that person is a spouse.
Though there are fewer cons than pros, the cons can carry more weight, depending on your circumstance.
Getting Help Navigating the Pros and Cons of Adding a Spouse to an LLC
AmeriEstate is here to help you determine how the pros and cons of adding a spouse to an LLC apply to your situation. We offer advice based on the potential impacts on your financial and estate planning goals and can guide you through establishing your LLC, regardless of whether you add your spouse. Contact us today to learn more about what we can do for you.
Sources:
https://www.irs.gov/retirement-plans/one-participant-401k-plans