Can My Spouse and I Operate a Business as a Sole Proprietorship Or Do We Need to Be a Partnership?

 Posted on August 17, 2018 in Small Business Taxes

If you are considering opening a business with your spouse, there are several important areas to consider. One such area is what type of business should be formed. There are different reasons why one would select a corporation, an LLC, or a partnership for his or her business. Additionally, there may be legal constraints on this decision. 

With regard to a business operated with a spouse, people may wonder if a partnership is the correct type of business to form given that the two people operating the business are married. While the IRS has given guidance on this issue, it is always best to contact a tax and business formation attorney to understand what is required under law based on the facts of your case.

According to the IRS, if the business is a sole proprietorship, it must be owned only by one spouse. The other spouse can work at the business as an employee. If the business is owned and operated by both spouses, the business must be a partnership. All partnerships must file IRS Form 1065, U.S. Return of Partnership Income.

It should be noted that there are two ways spouses who jointly own a business do not have to classify their business as a partnership. One way that is especially important to keep in mind in California is if the business operates in a community property state. California is one of nine community property states. Thus, spouses jointly operating a business in California may not need to register their business as a partnership. The other way spouses can avoid forming a partnership is if they qualify and elect to have the business classified as a qualified joint venture.

Seek Assistance from a San Jose, CA Business Formation Lawyer

If you are thinking about starting a business, a business and tax attorney can help save you time and give you the confidence that you are operating in accordance with the law. Furthermore, a skilled attorney can help if you are considering restructuring your business to better suit your operations or to maximize tax benefits.

Whether your issue is straightforward or novel, our firm will take the time to understand your situation and provide customized advice. We represent and advise owners of businesses of all sizes and types. Contact our trusted San Jose, CA business formation attorney by calling 408-866-1810.

Source:

https://www.irs.gov/faqs/small-business-self-employed-other-business