Is a Husband-Wife LLC Treated as a Single Member LLC?

Question:

If a limited liability company is owned only by two spouses, does the IRS consider the LLC consider the married husband-wife pair a single owner or as two owners? What are the tax consequences to the LLC?

Answer:

The answer to whether an LLC owned by a husband and wife are treated like a sole proprietorship or like a partnership depends in part on the state where the LLC is located. Generally, a business entity with two or more members is classified for federal tax purposes as either a corporation or a partnership. That general rule applies equally even if the two members are husband and wife. Since the default rule for multi-members LLCs is that the LLC is treated as a partnership, an LLC composed solely of a husband and wife will be a partnership for tax purposes unless the members choose to have it elect to be treated as a corporation.

There is one exception to the general rule, however. If the husband and wife are in a community property jurisdiction and the business meets three conditions set out by the IRS in Revenue Procedure 2002-69, the entity will be treated as a “qualified entity.”

If the LLC is a “qualified entity,” and the LLC, and the husband and wife as community property owners, treat the LLC as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes. In that case, the husband and wife would report the income and expenses of the LLC on Schedule C of their Form 1040.

If the LLC, and the husband and wife as community property owners, treat the LLC as a partnership for federal tax purposes and file the appropriate partnership returns, the Internal Revenue Service will accept the position that the entity is a partnership for federal tax purposes.

The requirements that an LLC must meet to be a “qualified entity” are:

• The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
• No person other than one or both spouses would be considered an owner for federal tax purposes; and
• The business entity is not treated as a corporation under the applicable Treasury Regulations.

The tax position, once taken, should be treated consistently from year to year. A change in reporting position will be treated for federal tax purposes as a conversion of the entity.