How a Husband and Wife Can Form an LLC

If you are a husband and wife looking to start a joint business and are considering a limited liability company (LLC), you can do so just as you would form any LLC, or choose to form a Family LLC. You just need to be aware of the tax implications before you do so.

What is an LLC?

An LLC is an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.

An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.

Family LLC

A Family LLC is a way to protect assets against liability, distribute them to heirs, and avoid probate. Members must be related by blood, marriage, or adoption.

A Family LLC is formed with the state, with one member designated as the managing member. The LLC will have an operating agreement that specifies rights related to ownership, how assets will be transferred, and how the LLC will be managed. Family LLCs can be used for business purposes including real estate or brokerage account assets, but a personal residence cannot be managed by a Family LLC.

A Family LLC can protect the family’s assets from the claims of creditors, but that protection is limited to the amount of each member’s financial contribution to the LLC.

The tax benefit of a Family LLC is that the value of assets transferred to heirs can be reduced by up to 40% of their market value, therefore reducing estate tax liability. It also reduces gift taxes when you distribute assets to your heirs during your lifetime by placing them in the Family LLC.

Family LLCs are often used in estate planning because of the asset protection and tax benefits. It is also a way to keep assets in the family.

Tax and Other Implications

If both husband and wife are involved in the LLC, having both of you as members protects both your personal assets from liability. You may, however, have to be taxed as a partnership or a corporation rather than a sole proprietorship depending on your state of residence. If your state is a community property state, you can generally be considered a single-member LLC even if you’re both members.

If you are married, but file your personal taxes separately, each of you will need to report your share of profits or losses from the LLC on your personal tax return.

In Closing

Whether you as husband and wife plan to work together or are forming an LLC for estate planning purposes, it’s easy to do. You may want to consult with a tax professional or an attorney before doing so, however, to make sure it’s the right choice for both of you. If you’re forming an LLC for estate purposes, you may have options that are more beneficial. It’s best to have a professional assess your particular situation and advise you on the optimal choices.