LLC - Marital property

[KJ Judd]

Wisconsin is a marital property state. A husband & wife who are the sole members of an LLC can file a Schedule C as they are considered one member.

Here's my question. H&W are considering having wife own more than half of business (51%/49%) to qualify as a women owned business. In this case, would a partnership return need to be filed? A simple Schedule C splits the income 50%/50%. So there would be a slight difference for SE purposes & a retirement account purposes.

If Form 1065 is needed, the client will need to evaluate if cost of additional return is less than the additional benefits of being a woman owned business.

Anyone encounter a similar situation?

[JG EA]

Similar but different

I have a similar problem from a different angle. Husband and wife in a community property state want to do a sec 105 and hire the wife as an employee. But, the state auditor said there may be a problem because they are viewed as having a joint ownership in the business.

At first glance I thought that would be your solution. Have the wife file a Schedule C and hire the husband. But how would that reflect the LLC? If it seems that they are in reality 50/50 then anything they do to change that percentage would be artificial.

What about checking with your state and find out the qualifications for a woman-run-business to receive whatever benefits they are trying to get. Perhaps this has come up before and there is another non-tax way your can overcome the requirements without an artificial % split.

[S T]

Where Is Armando?

I am surprised that Armando has not posted to this question! This is one of his favorite issues.

What is the difference between a marital property state and a community property state? Are they one in the same? I think so, but not sure, I am in Calif so we always refer to Community Property State.

If so, there have been some lengthy discussions here on this Board on this issue regarding LLC and partnerships. And there are two entirely different viewpoints as to how they should be handled. See http://www.thetaxbook.com/forums/sho...ht=partnership

If the t/p is being recognized as a partnership (h/w) then they should file as a partnership on form 1065. Yes again, you can I suppose split the business 50/50 on the Schedule C, but there is NO provision to split the SE tax.

If spouses carry on a business together and share in the profits and losses, they may be partners in a partnership whether or not they have a formal partnership agreement. Spouses should report income or loss from the business on Form 1065, U.S. Return of Partnership Income (PDF). They should not report the income on a Form 1040 Schedule C, Profit or Loss From Business (PDF) in the name of one spouse as a sole proprietor.

If each spouse is a partner in a partnership, each spouse should carry his or her share of the partnership income or loss from Form 1065, Schedule K-1, Partner's Share of Income, Credits, Deductions, etc. (PDF), to their joint or separate Form(s) 1040. Each spouse should include his or her respective share of self-employment income on a separate Form 1040 Schedule SE, Self-Employment Tax (PDF). Self-employment income belongs to the person who is the member of the partnership and cannot be treated as self-employment income by the nonmember spouse, even in community property states. This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based
.

California for DBA license filing status purpose, a husband and wife can file as a partnership without having to file for IRS filing status or Calif state status as a partnership. So the DBA status would be recognized, but I do not believe the Tax Filing Status would be recognized. For an LLC IRS has the form 8832 mentioned that must be filed. If a SINGLE member on a LLC, they would be a disregarded entity and file a Schedule C for ONE single member. Otherwise if more than a Single Member, they should have filed the 8832 to be elected as a partnership or an S Corp, then would file a form 1065 or form 1120S.

So what do the LLC Articles state as to "Members"? How many members signed the Articles??

Under Rev Proc 2002-69 which Wisconsin is included, you can either elect to be treated as a Partnership or opt out and be treated as a Sole Proprietor. If you elect to be treated as a sole proprietor then ALL SE will be allocated to only one "spouse", the spouse considered to be the proprietor, not split between spouses.

Sandy

[KJ Judd]

Thanks for your feedback. Currently the husband is partner with another individual (not the wife). The partner wants out. So client is considering taking that business plus another business he owns as a sole proprietor and becoming one LLC. He's considering whether it makes sense to bring the two businesses together. Also, he believes there are benefits as a women owned business. I'm meeting with them on Friday regarding the tax implications.

So, Sandy (ST), there is no LLC agreement to reference yet. This is in the planning stage. I use Lacerte & it allows me to do a Schedule C as joint business. Then a Schedule SE is generated for Husband & Schedule SE for wife showing half profits to each. This is the same result as if I filed a partnership return with 50%/50% partners. So I believe if they're 50%/50%, I do not need the Form 1065.

They are going to meet with their attorney as well. As I haven't met with them yet, I don't know the responsibilities each will have in the business.

[Armando Beaujolais]

Don't worry, I'm still lurking out here.

There needs to be a separation of federal and state issues. Is the woman-owned business issue for SBA funding? There you have yet another separate issue.

Just a thought. Why not incorporate? It would be easy to do a 49% 51% split on ownership.

[KJ Judd]

Thanks Armando. I'll mention incorporating. However then we'd have payroll issues to deal with. I don't believe there will be any other employees.

[S T]

Sba

KJ,
I have been involved in a couple of SBA transactions in the Southern Calif District. They have been minorities. Takes months and a lot of documents and paper. Your district and underwriters might have different guidelines.

But some of what SBA loan underwriters required were the formation of the business. They would consider a Single party, or if more than one party (whether it be husband and wife or other combination of partners ) they required an entity formation such as a partnership or S corp or LLC. They would not consider the application if it was a husband and wife, sole proprietorship.

We have had to supply partnership agreements, or Articles of Incorporation, or Articles of Organization (LLC) Very lengthy process, and a lot of documents and projections, or past history of a business (balance sheets, bank statements, profit and loss, tax returns, etc) for at least 2 years and in a couple of cases 3 years.

So maybe if I understand your post, it would be better if the spouse (wife/female) were to organize her OWN business to obtain any SBA funding and consideration. Possibly an LLC and then make an election as to which entity form.

I apologize for not posting the above in prior, I just got sidetracked with the h/w partnership issue and tax reporting.

Sandy