Should You Add Your Spouse to Your LLC?
If you’re running an LLC, it might seem logical to add your spouse. They’re your life partner and likely help you run the business. Including them makes sense, right?
The reality is that adding a second person to an LLC can create additional complexities for your business and its tax filing requirements. Here’s what you need to know and some alternative solutions that might be better.
Why You Might Want to Add Your Spouse to Your LLC
There are many reasons to consider adding your spouse to your LLC.
If your spouse participates in the LLC, it might be hard to define their role. Are they a contractor? Employee? Partner?
When their role is murky or undefined, it’s possible that they could be held personally liable for their work in relation to the LLC. Adding them as a member could help protect them and any joint assets you share.
Property With Business Uses
In the event you use personal property like a car for business, you might want to add your spouse to your LLC. For example, if you use their car for a business trip, it could open up liability and tax questions if they’re not a member of the LLC.
If your spouse works for your LLC as an employee, you need to follow minimum wage laws and pay payroll taxes like Social Security and Medicare taxes. If they are a partner, you can avoid some of these requirements and save your small business money.
Drawbacks of Adding Your Spouse to Your LLC
Before adding your spouse to your LLC, you also have to consider some important drawbacks.
Complexity and Potential Added Costs
In most states, adding your spouse to an LLC means that your business will be treated as a partnership for tax purposes. Partnerships have more complicated tax filing requirements.
You may also need legal help to write up new LLC documents. The potential need to seek legal counsel may even end up costing you more money.
Loss of Control
Adding your spouse as an LLC member gives them more say in how you run the business. Hopefully, if you and your spouse are generally on the same page about things, this won’t be an issue for you.
However, if your relationship is rocky or you get into frequent disagreements, it’s something to consider.
Relationships can be difficult, and running a company with your spouse may lead to more marital stress or disagreements. It’s important to consider the relationship ramifications adding your spouse to your LLC may bring before taking this step.
LLCs and Community Property States
Though you can add your spouse to your LLC regardless of where you live, how it impacts your business will depend on your location.
Some states are community property states. In these states, both spouses are considered full owners of all assets and debts earned or incurred during their marriage. For example, if you buy a car after getting married, even if you’re the one who paid for it, your spouse is also considered a full owner of the vehicle.
The list of states with community property laws are:
- New Mexico
Community property laws are important here because adding your spouse to your LLC in a community property state allows you to meet IRS requirements for a qualified joint venture.
Typically, a business jointly owned by married spouses is treated as a partnership by the IRS. Qualified joint ventures do not have to file taxes as a partnership and can instead be treated as single-person entities.
This allows these LLCs to avoid the more complex tax filing requirements of partnerships and to take advantage of certain tax benefits.
It’s also worth noting that Collective works with LLCs that have married spouses as members in community property states. However, we don’t work with multi-member LLCs, including those owned by spouses in non-community property states.
Considerations for LLCs Taxed as S Corps
Unless you live in a community property state, adding a spouse to your LLC means that you’ll no longer be allowed to file as an S Corp.
If you live in a community property state and can maintain the S Corp designation, remember that the rules regarding reasonable compensation still apply if you add your spouse as a member.
When both spouses do more than minor work for the business, they have to be on the payroll and receive a reasonable wage for the work they do. You can’t simply add your spouse as a member to avoid paying them a fair wage and save money on payroll taxes.
How to Add Your Spouse to Your LLC
When adding your spouse to your LLC, you’ll need to add them as a new member by amending the operating agreement of the LLC.
If you’re currently the only member of the LLC, this is easy to do. You just need to decide to amend the agreement and make the change. However, if you have other members in your LLC, you’ll need to hold a vote and have the other members approve the change.
Once you’ve amended the agreement, you’ll want to file the new documents with the state. You may also have to amend the Articles of Organization to mention the new member and file those with the state as well.
If you’re changing from a single-member LLC to a multi-member LLC that will now be taxed as a partnership, you might also need to get a new EIN from the IRS or file a Form 8832.
Some states have other processes that you need to follow to add a new member to an LLC or don’t require operating agreements. Be sure to check state law and consider consulting a lawyer for assistance to avoid making any mistakes.
Alternatives to Adding Your Spouse to an LLC
Even if your spouse works with your business, you don’t necessarily need to add them to your LLC. There are other ways to have them involved without complicating your business structure.
Hire Your Spouse as an Employee
If your spouse works for your business, you can hire them as a regular employee. This means drafting an employment contract, outlining their duties and giving them a wage that meets minimum wage requirements.
Keep in mind that you also have to pay them through regular payroll and pay payroll taxes.
Have Your Spouse Work as a Contractor
If your spouse only does occasional work for your LLC, you can have them work on a freelance or contract basis. This can help your business save money on Social Security and Medicare taxes, but the full burden of those costs will fall on your spouse. In the event you file your taxes jointly, this means you’ll still incur this cost anyway. Additionally, you must make sure to pay your spouse market rate for the work they do for your business.
Designate Your Spouse as a Manager of the LLC
An LLC’s manager is an individual or group that serves as an officer of the company and has the power to make decisions on behalf of the business. If you designate your spouse as a manager, they have the power to make key decisions without having to be a member of the LLC.
If you’re married and run an LLC, you may think adding your spouse is a good idea. There are benefits, but it does add legal and tax-related complexities to the business.
Before you make the leap, consider all the pros and cons and evaluate the alternatives. You might be able to give your spouse a key role in the business without giving up the benefits of running a single-member LLC.
TJ Porter is a freelance writer based in Boston, Massachusetts. He began covering finance while earning a degree in business at Northeastern University in Boston, Massachusetts and enjoys writing about credit, investing, real estate topics. When he’s not writing, TJ enjoys cooking, sports, and games of the video and board varieties. You can contact him at find more of his work at TJPorterWriting.com