Interested in going into business with your spouse but not interested in creating a formal business entity? The IRS allows married couples to structure their businesses as sole proprietorships…but certain conditions must be met. See if your business qualifies as a sole proprietorship.

What is a sole proprietorship?

A sole proprietorship is an unincorporated business owned by an individual. If a married couple decides not to operate as a partnership, limited liability company (LLC) or corporation, they can run as a sole proprietorship under an IRS exemption. This is often referred to as a qualified joint venture.

What are the conditions?

To qualify as a sole proprietorship the following conditions must be met:

• The only members in the joint venture must be the married couple,
• The spouses must file a joint tax return,
• The couple must own and operate the trade or business as co-owners (cannot be under the name of a state law entity such as an LLC or LLP),
• Both spouses are required to materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and
• If the business has any employees, one of the spouses must be designated as being responsible for paying and reporting the employees’ withholding taxes

What are the filing requirements?

There is no separate IRS form to elect qualified joint venture status. Both spouses must file a joint tax return on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. The couple must divide the items of income, gain, loss, deduction, credit, and expenses according to their respective interests in such venture.

Additionally, a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040), Profit or Loss From Farming, must be filed with their form 1040, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax to pay self-employment taxes.

The spouses use their social security numbers unless the business has one or more employees. If there are employees, the business must obtain an employer identification number (EIN).

What is the draw of the sole proprietorship structure?

Married couples might elect sole proprietorship/qualified joint venture status because:

• Sole proprietorships are easy to establish—you can launch your business quickly without having to file petitions with state and federal agencies.
• It’s easier to file as a sole proprietorship than a partnership. There are no added returns and you do not need to file K-1 or form 1065.

And the drawbacks?

• If the business fails, you and your spouse are 100% liable.
• Sole proprietorships offer no protection from creditors.

Wondering what the best option is for you? Contact us.