Starting a business with your spouse is an exciting—and often demanding—milestone. You are blending personal partnership with professional ambition, combining your assets, skills, and futures into a single venture. When it comes time to formalize your company, the Limited Liability Company (LLC) is typically the legal structure of choice due to its flexibility and liability protection.
However, married couples face a unique layer of complexity that single-owner or non-related partner LLCs do not: the tax designation. When spouses own an LLC together, they must decide whether to be treated as a Multi-Member LLC (MMLLC) filing as a Partnership, or take advantage of a special election offered by the IRS, known as a Qualified Joint Venture, which allows them to file as two Sole Proprietors (often referred to as 'Joint vs. Split' filing).
Making the wrong choice can lead to unnecessary complexity, excessive taxes, or the erosion of liability protection. This guide breaks down the critical decisions involved when a married couple starts an LLC, helping you choose the best structure for tax efficiency and peace of mind.
The Default: Multi-Member LLC Filing as a Partnership
By default, if a husband and wife jointly own an LLC and live in any state that is not a community property state, the IRS treats the LLC as a Partnership. This requires the LLC to file its own informational tax return using Form 1065.
What This Means for Your Business:
- Separate Tax Filing (Form 1065): The LLC itself files Form 1065, which calculates the business's total profit or loss but does not pay tax.
- Issuing K-1s: After filing Form 1065, the business must issue a Schedule K-1 to each spouse, detailing their proportional share of the business's income and deductions.
- Personal Tax Reporting: Each spouse then reports the income from their K-1 on their personal Form 1040.
- Self-Employment Tax: Both spouses are typically responsible for paying self-employment taxes (Social Security and Medicare) on their distributive share of the partnership income.
While this structure is standard, it adds a significant administrative burden. Form 1065 is complex, often requiring the use of a CPA, and the cost of preparing two K-1s and the partnership return can be high. For many small, simple spouse-owned businesses, this overhead is unnecessary.
The Alternative: Qualified Joint Venture (QJV) Election
If you live in a non-community property state and your LLC is owned solely by you and your spouse, the IRS offers a simplifying election: the Qualified Joint Venture (QJV). This election bypasses the need for the complex Form 1065 partnership return.
Under a QJV, the LLC is effectively treated by the IRS as two separate sole proprietorships. This is the 'split filing' option you are often asking about.
Requirements for a Qualified Joint Venture (QJV):
- The only members of the LLC must be you and your spouse (domestic partners, civil union members, or common law spouses may not qualify).
- Both spouses must materially participate in the business (meaning both are involved in operations, not one being a passive investor).
- You must file a joint federal income tax return (Form 1040).
- The business must elect to not be treated as a corporation (which most LLCs don't do anyway).
Benefits of the QJV (Split Filing):
The primary advantage of the QJV is administrative simplicity and tax savings:
- No Partnership Return (Form 1065): You eliminate the need to file the complex Form 1065.
- Simplified Reporting: Each spouse reports their share of income and expenses directly on their own Schedule C (Profit or Loss From Business) attached to the joint Form 1040.
- Split Self-Employment Tax: Because the income is divided and reported separately on two Schedule Cs, each spouse gets credit for their share of self-employment income, which is crucial for maximizing Social Security benefits later in life.
The QJV structure is highly recommended for small, actively managed, spouse-owned LLCs that want the legal protection of an LLC without the tax complexity of a traditional partnership.
The Community Property Consideration: Treating the LLC as a Disregarded Entity (SMLLC)
If you and your spouse live in a Community Property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you have a third, even simpler option.
In community property states, the IRS allows a spouse-owned LLC to elect to be treated as a Single-Member LLC (SMLLC), which is considered a Disregarded Entity for tax purposes. Even though two people own it, the state property law treats them as one unit.
What This Means for Your Business:
- Only One Schedule C: The LLC files only one Schedule C on the joint Form 1040, reporting all income and expenses.
- No K-1s or Form 1065: All partnership filing complexity is avoided.
- Simplified Self-Employment Tax: While legally simpler, the downside is that only one spouse (the one listed as the primary operator) receives credit for the self-employment tax paid, which could impact the other spouse's Social Security standing.
If both spouses materially participate and want equal credit for Social Security, even in a community property state, the QJV election (filing as two Schedule Cs) is often the superior choice over the disregarded entity (filing as one Schedule C).
How to Choose: A Decision Framework
Your choice—Partnership (Form 1065), QJV (Split Schedule C), or Disregarded Entity (Single Schedule C)—should be driven by your state of residence, your desire for administrative simplicity, and your long-term Social Security goals.
Scenario 1: Non-Community Property States (Most States)
- Option A (Default): File as a Partnership (Form 1065). Choose this if your business is very large, complex, or if you plan to add non-spouse partners soon.
- Option B (Recommended): Elect for Qualified Joint Venture (QJV). Choose this if the LLC is small, run equally by both spouses, and you want to minimize tax complexity and maximize Social Security credits for both partners.
Scenario 2: Community Property States (CA, TX, NV, etc.)
- Option A: File as a Disregarded Entity (Single Schedule C). Choose this if simplicity is paramount and you do not care about splitting self-employment credits.
- Option B: Elect for Qualified Joint Venture (QJV). Choose this if both spouses materially participate and want equal credit for Social Security and Medicare contributions.
Beyond Taxes: Structuring the LLC Operating Agreement
While tax treatment is paramount, the legal backbone of your marital LLC is the Operating Agreement. This document defines the rules of your business relationship and protects both spouses.
A key concept here is the "divorce-proofing" clause. Your Operating Agreement must clearly define what happens to the business in the event of a personal separation, even if your marriage feels unbreakable today. State law—specifically family law—may override parts of your business agreement, so clear contractual terms are essential.
Key Clauses for Married Couple LLCs:
- Buyout Provision: Specifies the valuation method and terms for one spouse to buy out the other's interest if the marriage dissolves.
- Management Roles: Clearly defines who handles day-to-day operations and who has the authority to sign contracts. This prevents internal disagreements from crippling the business.
- Distribution Schedule: Outlines how profits will be distributed, separate from the tax treatment. For instance, even with a single Schedule C filing, the agreement should stipulate the 50/50 division of distributions.
Choosing the right tax structure (Joint vs. Split) is a powerful way to reduce paperwork and save money. But protecting your personal relationship and your business entity requires a carefully drafted Operating Agreement. Always consult with a CPA specializing in small business taxation and an attorney familiar with LLC formation in your state to ensure your spouse-owned venture is legally sound and tax-optimized.
The LLC is the right vehicle; you just need to ensure you apply the right tax engine.