Husband and wife taxed as SP in LLC

[pooks130]

Someone please clarify this for me...

Can a husband and wife elect to be taxed as a sole proprietor if they are both members of an LLC.  If so, how?  What forms do you fill out, etc.  We live in Illinois.

Thanks.

[Dave T]

No.  A sole proprietor means there is exactly one -- not two -- owners of the business.

In your situation, you and your wife are both member/owners -- you are partners.  Your LLC defaults to partnership tax treatment.

[pooks130]

Thats what I thought, but I have been reading some things stating that in states that have community property laws, then the husband and wife could be treated as a sole proprietor.  Any insight on this?

[Dave T]

That's true, but Illinois is not a community property state.  That IRS ruling does not apply in your state.

[pooks130]

Okay thanks.  What would one suggest on setting up a company then.  We really to avoid having to do the extra paper work for a partnership.  I do most of the paperwork (pay bill, collect rents, etc), but I also check out properties for purchase and show the house to tenents.  

Would it be suggested that I (1) work for the company and get a w-2 (2) Just run the business as a partnership (3)  run it as a sole proprietorship, keep doing what I'm doing and just know that the profits are coming to our joint bottom line anyway?

Thanks.  

[Dave T]

If you establish an LLC with yourself as the sole member, then you accomplish your goal.   No need to take a salary, because rental income is passive income and payroll taxes don't apply.  

If you take a salary from the business, then you are converting some passive income to active income, increasing your taxes, leaving less after tax income in your pocket.

[pooks130]

Both me and my husband are involved in the business, and all the properties are currently in his name because he is the only one with a w-2 income.  Thus, what roles/positions in an LLC would you suggest for us.  

Thank you so much for your insight.

[Dave T]

Up to you both.  You can choose to be co-managers, or one of you can take the primary lead.  Does not change the character of the LLC -- it is still a partnership.

For asset protection, title to the investment real estate needs to be tranferred to the LLC, so, your husband's individual ownership goes away.

[mcwagner]

your LLC can have one member (thus avoiding the partnership tax hassle) and still have two managers.

[pooks130]

Thank you so much for that info, MCWagner.  So on the Articles of Organization would we put that the company is managed by the Manager or the mamagement is vested in the members?  Thanks

[mcwagner]

managed by member

you need a written operating agreement that specifies any other managers.

[providence]

Mark,

This stream brought a question to  mind about asset protection.  Doesn't the single member llc structure jeopardize proper asset protection?

Dave

[mcwagner]

No. States specifically (by statute) authorize single member LLCs.  Since the provision for single member is written into law, it will, by itself, not weaken the asset protection.  

However, one must be careful to operate the LLC as a seperate business entity, and not operate it as a sole proprietorship.  Doing that WILL bust the asset protection.

[Land Baron]

your LLC can have one member (thus avoiding the partnership tax hassle) and still have two managers.

Would you please elaborate on this?

I'm looking for the simplest set-up with the lowest tax-burden (isn't everyone?).  I realilze that I could go with a single-member LLC, but is this set-up affected if my wife participates at all (showing homes, helping paint, etc.)  I don't want to pay her as an employee due to the additional taxes.  For the same reason, I'd rather stay with a single-member rather than a partnership LLC set-up.

Also, with a single-member LLC, I assume the deed is in the LLC's name?  I'm concerned about protecting my wife's financial interests, even if it's unofficial.  How is my wife's interest protected should something happen to me?  Would she become owner of the LLC and homes?

Thanks in advance.

[mcwagner]

your wife's participation has nothing to do with how many members the LLC has.  She can be manager, employee, contractor, unpaid volunteer, whatever.

a single member LLC taxed  as a disregarded entity will still be joint for taxes if you're in a community property state.  this doesn't have an effect on the LLC itself, only your tax return.

you do have a will, don't you?  no?  get one.

the LLC membership is considered personal property and passes with your estate in the event of your untimely demise.  Whatever the LLC owns is still owned by the LLC.