Let’s start off with the basics. First off, let’s talk about the difference between a single member LLC and a multi member LLC.
With a single member LLC, there is one owner, or member, who has total control over the company. The LLC is its own entity, legally speaking.
A multi member LLC is what it sounds like. It is an LLC where there are two or more owners, or members, that share the control of the company. In fact, the number of members in the multi member LLC is unlimited, unless it elects to be taxed as a S corporation, which limits its members to 100 or less.
The multi member LLC decides the percentage of profits and losses are distributed amongst members. Like the single member LLC, this LLC is also its own entity.
When a husband and wife start a business together, it’s pretty common that they set up an LLC. A lot of people choose the LLC business structure because it provides good protection and separation between yourself and your business from a liability standpoint. It allows you to protect your personal assets in case there were to be a lawsuit against the company.
And, it’s simple and cost efficient to set up an LLC, especially if you use a reputable online service to set it up like Zen Business.
Now with a husband and a wife – two members in the LLC, it sounds like it would probably be a multi member LLC, right? Well, maybe.
As a married couple, depending on the state you live in, you may be able to be treated as a single member LLC. This can certainly have some advantages, particularly for federal tax purposes.
Keep reading to learn more about single member and multi member LLCs, including which is better, how to go from one to the other, and what it means for tax purposes.
Is a husband and wife LLC a single member?
Typically, if there are two or more members, the entity is classified as a corporation or partnership for federal tax purposes. And, for multi member LLCs, they are treated as a partnership by default. So, an LLC that is made up of a husband and wife will be a partnership unless they choose to be treated and taxed as a corporation.
A husband and wife LLC is an exception though. A husband and wife LLC can be treated as a single member LLC depending on the state where the LLC is located. If the husband and wife are in a community property state and the business meets three conditions outlined by the IRS, the entity will be a “qualified entity” and treated as a disregarded entity and like a single-member LLC when it comes to federal tax purposes.
The list of community property states currently include AZ, CA, ID, LA, NV, NM, TX, WA, & WI.
To be a “qualified entity,” the LLC must meet the following criteria:
- The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
- No person other than one or both spouses would be considered an owner for federal tax purposes; and
- The business entity is not treated as a corporation under the applicable Treasury Regulations
So, if you are a husband and wife and want to have a single member LLC, it’s certainly possible. You just need to have your LLC in a community property state and also meeting the “qualified entity” criteria to be taxed as a disregarded entity.
Is it better to be a single member LLC or multi member LLC?
So now that you know it’s possible for a husband and wife LLC to be treated as a single member LLC< you’re probably wondering why you would want to do that.
Deciding on whether to have a single member LLC or multi member LLC will really depend on your preference. Either way, you will have an operating agreement, but with the multi member LLC, it will more clearly define what will happen in the event of disagreements between members or a member deciding to leave the LLC.
Some people prefer a single member LLC because it’s easier for taxes. A federal tax return isn’t required unless the business elects to be treated as a corporation. The income is simply reported on the member’s tax returns. In contrast, a multi member LLC is required to file tax return and provide each member with a K-1 form to file with their tax returns.
Another distinction between the single member and multi member LLC is the management of the business. The single member LLC has just one owner or member, so there are no shared responsibilities. However, with a multi member LLC, the owners will need to decide how the business is managed. It could be member managed, meaning all the members participate in the business. Or it could be manager managed, meaning all the members designate one member to manage the operations of the business.
Whether you decide to set your husband and wife LLC up as single member LLC or multi member LLC, it’s simple to do when you use an online service like Zen Business. They have multiple options that allow you to customize your services based on your needs. The nice thing about using Zen Business rather than an attorney to set up your LLC, is that you can save a lot of money (and maybe even time), which you can ultimately just pour into your business instead.
Can a single member LLC become a multi member LLC?
So maybe you decide to set up your LLC as a single member LLC, but down the road you realize a multi member LLC is really the best way to go for you and your business. Can you make the change? How do you make the change?
Yes, a single member LLC can become a multi member LLC. If you decide to add a member to the LLC, the LLC will then change from a single member LLC to a multi member LLC. This will also change the way your LLC is taxed as it will now be considered a general partnership (unless the LLC is already being taxed as a corporation).
If you decide to change your LLC from single member to multi member, you will need to file short year tax returns for the period in which the LLC is a single member LLC, and a second short year tax return for the period the LLC is a multi member LLC since it will be taxed differently. That can become a little complicated so you will want to be sure and consult a professional to make sure you do it all correctly.
How do married couples file taxes for an LLC?
If a married couple operates their business with a single member LLC, then that married couple will likely file a joint tax return for the LLC. This will include a Schedule C for their business. They will prepare their taxes like their LLC is a single member LLC. The same is also true for same sex couples legally married according to their state law.
Generally speaking, by filing a joint tax return, the couple will benefit from income tax savings. It is important to note that all income, deductions, asset gain or loss has to be divided between the spouses based on each spouse’s ownership percentage.
If a married couples elects to only have one spouse as the sole company member of the single member LLC, the situation is a little different. If the spouse that is not part of the LLC does work for the business, you will want to clearly record that person’s role in the business. Are they an employee or independent contractor? If you don’t clearly show that spouse’s status, they could be considered an additional LLC member, which could cause some issues with your taxes.
Husband and wife LLC operating agreement template (what it should include)
It’s a good idea for a husband wife LLC to include an operating agreement. Really, we recommend any LLC have an operating agreement, regardless of whether or not the state requires it. In case one spouse decides to buy the other spouse out at some point or you need to dissolve the business, the operating agreement will help put a plan in place.
In general, you will want to include things about how your business will be governed, the division of membership rights, how decisions will be made, voting rights, and distribution of profits and losses. By putting these types of things down on paper in a formal way, it can help to diffuse any arguments or awkward situations in the future should any of these items arise.
An operating agreement really makes you consider the different scenarios that could occur and creates a dialogue between members to make sure everyone is on the same page.
While it’s always recommended to have an operating agreement between members in an LLC, it can become a lot more complicated between spouses if there is not an operating agreement in place. It’s no longer just some friends or business partners having a discussion. It’s husband and wife. So now it’s a business debate, it also becomes a marital debate.
While a lot of couples think they won’t need one since they’re married, there are some very serious questions to consider that may change your mind:
- What if we get a divorce?
- What is one spouse passes away or becomes disabled?
- What if the marriage includes multiple grown children from each spouse?
We should point out that things may be different if you live in a community property state. Let’s say, for example, that you guys choose to have one spouse own a larger percentage of the LCC than the other. That’s all good and fine and can work. But, if you live in a community property state and you get divorced, it’s likely that the courts will rule that you and your spouse have equal ownership rights in the LLC, regardless of what the operating agreement says.
Ultimately, depending on your situation, your operating agreement will differ. And the easiest thing to do is to consult a professional service, like Zen Business. By using a professional service, you can rest easy knowing that it’s being put together in the best way to protect you both and your business.