husband and wife LLC

[oceanlovin'ea]

If an LLC is set up with both a husband and wife as members, is it required that the LLC do a partnership return? or can they do 2 schedule C's?
I seem to remember something in the back of my mind about that but can't dig it out.

Thanks

Linda, EA

[rkhan71]

See if this helps...

Joint Ownership of LLC by Spouse in Community Property States

Rev. Proc. 2002-69 addressed the issue of classification for an entity that is solely owned by husband and wife as community property under laws of a state, a foreign country or possession of the United States.
If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.

Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes. A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.

A business entity is a qualified entity if:

The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or 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 IRC §310.7701-2.
Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be “qualified joint ventures” (which can elect not be treated as partnerships) because they are state law entities. For more information see Election for Husband and Wife Unincorporated Businesses.

Hope this sheds some light.

RFK

[TAX4US]

What happens in a non community state where H is the owner/member and wife is only bookkeeper per say. It looks like from the documents that H never intended for wife to be a member.

[oceanlovin'ea]

Exactly

Florida is not a community property state. He is the owner/ member manager and she is listed as secretary. I think they set it up before they asked questions about it.
I also think people do this "in case something happens" to husband. Wife still have control of the business.

Linda, EA

[mastertaxguy]

Spousal Partnership

1. See TTB 20-3, lower left column.
2. IF there was/is a partnership agreement, one of the spouses could be treated as a limited partner I suppose if the agreement so provided.
3. There is nothing requiring each spouse to have a 50% interest, as noted in the TTB cite.

[Lion]

H&W qualified joint venture would be a disregarded entity/sch C, but can NOT be an entity, such as an LLC. If a H&W LLC in a non-community property state, it defaults to a partnership. Partnerships are very flexible, as has been mentioned.

[ttbtaxes]

In non-community property states, having both H&W as members in their LLC is, for the most part, unnecessary and wastes resources. Have it set up as a SMLLC.

[oceanlovin'ea]

I agree

I agree that they should drop her name off. but for 2014 she was on the LLC so I guess for this tax year they will have to file a partnership return, won't they?

I will tell them to take her name off when they pay their fee to the state this year. Then for 2015 they can do a Schedule C again.

Thanks every one

Linda, EA

[oceanlovin'ea]

update

Client (friend) found the email I sent her last year telling her to take herself off the LLC so they could file as sole proprietor. She has 4 kids and is home schooling two of them. So she got distracted and never went back to do it. Will fix it with this filing.

Linda, EA

[jsamans]

Client (friend) found the email I sent her last year telling her to take herself off the LLC so they could file as sole proprietor. She has 4 kids and is home schooling two of them. So she got distracted and never went back to do it. Will fix it with this filing.

Linda, EA

That's the critical issue. If the wife is an employee of the LLC, then it's a Schedule C filing. If she's a Member, then they need the 1065, K-1s, and Schedule E for a partnership -- plus, they'll have to file a state partnership return. It's definitely a lot more work to be a partnership-taxed entity. I'm surprised that they formed the company in that way, since it sounds like it had previously been a sole proprietorship.

[oceanlovin'ea]

changed several times

It was an s corp when they lived in Georgia. They moved back to Florida, closed Georgia corp and set up sole proprietorship. Then he went to work for a company for a year or so. Decided to go back to working for himself after company changed ownership. Set up LLC with both names on it.

have another question but will start a new thread.

Linda, EA