Entrepreneurial Couples – Tax and Legal Considerations for Spouses in Business

Entrepreneurial couples are very common – the Wall Street Journal says a third of family businesses are husband and wife teams – and they represent a dynamic force in the small business world.

These partnerships can be immensely positive experiences and provide the foundation for a convenient and cost-effective business venture, especially if the marriage is sound in the first place. The flip side, however, can be disastrous.

So what’s the key to success? According to this article in “Reference for Business,” entrepreneurial couples and business consultants alike cite the following as important factors in a successful business venture with a spouse or partner:

• Both partners need to bring significant value to the business
• Partners should not be competitive with one another
• Newlyweds should exercise caution before partnering for business
• Good communication is essential
• Adapt to changing roles (i.e. your partner’s business persona may be quite different from what you are used to in your marriage).
• Separate work life and home life
• Set aside time away from your spouse or partner
• Objectively assess whether you and your partner would work well together in a business.

Tax and legal implications are also significant considerations. Here’s a quick rundown of what you need to do to ensure you comply with the necessary requirements.

Structuring Your Business

For federal tax purposes, an unincorporated business jointly owned by a married couple is classified as a partnership. This classification stands on the assumption that each spouse has an equal say and share of business affairs. This includes an equal voice and equal operational and capital contributions. In this case, business income should be reported on Form 1065, U.S. Return of Partnership Income.

This partnership classification also brings with it filing and record-keeping requirements, so some couples may prefer not to be treated as a partnership. Fortunately, a recent change in tax law offers eligible couples the opportunity to file as sole proprietors.

Under the Small Business and Work Opportunity Tax Act of 2007, “qualified” husband and wife joint ventures can be treated as sole proprietorships for federal tax purposes. Under this provision, each spouse must separately report a share of all of the business's income, gains, losses, deductions, and credits. Both will receive credit for Social Security and Medicare.

To be considered a “qualified joint venture,” your business must meet the following three conditions:

• A husband and wife must be the only members of the joint venture and file a joint return
• Each spouse materially participates in the business
• Both spouses agree not to be treated as a partnership

Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity such as an LLC) qualify for this option. If you choose to be treated as a qualified joint venture, this guide from the IRS explains your filing requirements: Election for Husband and Wife Unincorporated Businesses.

Employing Your Spouse

Rather than being structured as a partnership, a spouse can operate as a sole trader and hire his/her spouse as an employee. The structure you choose will depend on the needs of your business and a host of other factors. The major drawback to making your spouse an employee involves payroll taxes and workers’ compensation insurance. On the plus side, it can provide retirement planning benefits and additional tax deductions, such as travel expenses. Each state has its own laws about employing family members, so be sure to talk to an accountant or tax advisor first.

Talk to an Expert

If you are going into business with your spouse, married or not, hire an attorney to help you craft the nature of the business relationship, whether it’s a partnership, LLC, or corporation. Each of these is governed by state law, so an attorney can help advise you on such things as business formation, filing requirements, and tax ramifications in your state. SBA offers small business owners a useful overview of business structure options here. You should also formalize roles and responsibilities, fiscal matters, and succession or dissolution planning.

Additional Resources

• 10 Steps to Starting a Business
• 5 Tips for Managing a Successful Family Business

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley