Starting a business with your spouse is a rewarding experience. However, it comes with important decisions, particularly regarding business structure. Understanding the advantages and disadvantages of each option is essential to ensuring the structure you ultimately choose is the best for your situation and protects both spouses.

Business Structure Options

Each business structure option comes with its own set of tax implications, liability protections, and administrative requirements, making it important to select the one that aligns best with your goals and needs. Below are the primary business structures available for married couples, with their key pros and cons outlined for easy comparison. At Alpine Mar, we always recommend meeting with a tax professional experienced in business structure consulting before making your final decision.

Sole Proprietorship

A sole proprietorship is the simplest structure, with only one spouse as the official owner and the other as an assistant or employee.

  • Pros:
    • Easy to set up and manage
    • Minimal paperwork
    • The sole proprietor has complete control, making decision-making easier
  • Cons:
    • No liability protection; the owner’s personal assets are exposed to business debts and lawsuits
    • Only one spouse is recognized as the owner, resulting in unequal control of the business

General Partnership

A general partnership allows both spouses to share ownership and management equally, offering flexibility but lacking liability protection.

  • Pros:
    • Equal ownership and decision-making
    • Simple tax treatment as a pass-through entity; business income is reported on personal tax returns
    • Shared profits and responsibilities
  • Cons:
    • No liability protection; both spouses’ personal assets are at risk
    • Potential for conflicts due to equal control

Limited Liability Company (LLC)

An LLC offers liability protection with flexible tax treatment making it a popular choice for married couples. Spouses can co-own the business or have one spouse as an employee.

  • Pros:
    • Protects personal assets
    • Flexible tax treatment as a pass-through business; can be taxed as a sole proprietorship, partnership, or S corporation
    • Fewer filing requirements than corporations
  • Cons:
    • More paperwork to do and fees to pay than a general partnership or sole proprietorship
    • Ongoing compliance and administrative tasks

S Corporation (S Corp)

An S corp is not an actual business structure; it’s a tax election for LLCs or corporations, offering liability protection and potential tax savings. It allows you to pay yourself and your spouse salaries and take dividends, potentially reducing self-employment taxes.

  • Pros:
    • Liability protection for personal assets
    • Each spouse can take a reasonable salary along with dividends
    • Tax savings through reduced self-employment taxes
  • Cons:
    • More rigid filing requirements and IRS rules regarding salaries and dividends
    • Limited to 100 shareholders who must be US citizens or residents
    • More complicated to establish and operate than an LLC

You can learn more about this tax designation in our article “Is an S-Corporation Right for You?”

C Corporation (C Corp)

A C corporation offers the strongest liability protection and is ideal for couples planning to grow their business significantly or attract investors. However, it comes with the downside of double taxation for shareholders, as both the corporation and the owners pay taxes on profits.

  • Pros:
    • Strong liability protection for personal assets
    • Unlimited growth potential, allowing for outside investors and the issuance of shares
    • Suitable for businesses planning to go public or to raise foreign capital
  • Cons:
    • Liable for double taxation on shareholders, with corporate taxes on profits and personal taxes on dividends
    • Complex setup and higher administrative costs
    • Requires extensive paperwork and compliance with corporate laws

Qualified Joint Ventures

If you and your spouse decide a partnership is the right structure for you, you can take the Qualified Joint Venture (QJV) election. A QJV allows married couples to file taxes as two sole proprietorships, rather than a partnership. Spouses make the election on a joint Form 1040 or 1040-SR by splitting all income, gains, losses, deductions, and credits based on their respective interests in the joint venture.

Pros:

  • Simplifies tax filing with separate Schedule C forms for each spouse, filed with their joint tax return
  • Both spouses contribute to Social Security benefits through self-employment taxes
  • No need to file partnership returns (Form 1065), reducing administrative costs

Cons:

Consulting with a tax professional will help you determine if a QJV is the right fit based on your specific situation.

Joint Ownership vs Employee-Spouse

When married couples start a business, they must decide whether to be co-owners or have one spouse act as an employee. Both options have different tax consequences, levels of personal liability, and operational implications.

Joint Ownership

  • Both spouses share equal ownership and responsibilities.
  • The business’s income is split and reported on personal tax returns.
  • Active participation allows both to contribute to business operations.
  • The drawback is that both spouses share liability for debts and legal issues.

It’s crucial to note that equal ownership also means shared responsibility for debts and potential legal issues. This makes liability protection an important consideration when choosing the structure of your business.

Employee-Spouse

Alternatively, one spouse can own the business while the other is an employee.

  • One spouse is the sole owner with primary control, while the other is an employee.
  • Businesses can deduct the employee-spouse’s salary as a tax-deductible expense.
  • The employee-spouse must be paid a reasonable salary to avoid IRS scrutiny.
  • The spouse acting as an employee can receive benefits like health insurance and retirement plans.
  • A drawback is that it limits the non-owning spouse’s involvement in decision-making and profit-sharing.

The main advantage of this model is that the employee-spouse’s assets are not at risk. However, the inequality in control, decision-making, and profit-sharing makes it essential to weigh the pros and cons carefully before opting for an employee-spouse business structure.

The Importance of Having a Contract

Regardless of how you structure your business, it’s essential to have a legally binding agreement in place. A partnership agreement, LLC operating agreement, or contract will outline what happens to the business in the event of death or divorce, preventing disputes and ensuring smooth business transitions.

For example, if one spouse passes away, does the other automatically take over the business, or will ownership be transferred to a beneficiary? Or, if there is a divorce, will the business continue or be dissolved? If it continues, how will it be divided between the spouses?

Working with a lawyer to discuss these questions and potential events will allow you to draft a tailored contract protecting both spouses’ interests and avoid an unintended business dissolution.

Build a Strong Future Together

Choosing the best business structure for husband and wife endeavors requires careful consideration of your goals, the level of liability protection you need, and how you want to handle income taxes. Whether you decide to set up a sole proprietorship, partnership, LLC, or corporation, it’s essential to understand the pros and cons of each structure and the available tax elections such as an S corp or QJV. Additionally, if one spouse is an employee rather than a co-owner, that distinction carries its own set of benefits and responsibilities.

Finally, don’t forget the importance of having a solid contract in place. Planning for future events, such as death or divorce, can prevent conflicts and protect your business. By taking the time to make these decisions thoughtfully with professional advice from a CPA and a lawyer, you can build a successful business that benefits both you and your spouse in the long term.

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