“There comes a time when a man and woman realize that their separate schemes can be better achieved as a conspiracy.”-Robert Brault
A husband and wife business can be highly successful and there are some tax benefits to be considered.
Women applaud the work of designer Kate Spade, never realizing that her husband Andy helped Kate to develop her designs into a major clothing company that Neiman Marcus snapped up. We recognize Harry Thomason and Linda Bloodworth-Thomason for producing a number of highly successful TV series (“Designing Women”). Clif Bars are the brainchild of Gary Erickson and Kit Crawford, created in Gary’s early bakery and sold by Kit. Now Gary handles the supply chain of this popular bar while Kit runs their nonprofit foundation (funded by their success). In each of these examples, the husband and wife have worked together toward a common goal and achieved it. They are just part of the over 1.2 million husband and wife business, contributing over 50% to the Gross Domestic Product Index today.
There are a number of ways a husband and wife business can be established, and to do this, you must consider your particular situation. If both of you are knowledgeable about the business, will both of you be owners? Or will one of you be an employee? Can both of you work the business full time, or does one of you have other commitments? Answering these questions will help you to decide what will be the legal structure of your company: sole proprietor, LLC, or corporation.
If both of you are involved in the ownership and running of the business, there is a special tax area that your tax team should look into. In 2007, the Small Business and Work Opportunity Tax Act went into effect. If you can meet the strict criteria set by the IRS, a husband and wife business can be considered a “joint venture” and as such, can receive some tax benefits. To be a joint venture involving a business or trade, three things must be present:
1. The husband and wife are the ONLY members of the joint venture.
2. Both of them actively participate in the functioning of the business.
3. Both of them agree that they are a “joint venture.”
This is a complex issue simply stated; when a husband and wife meet these criteria and file a joint return, their business relationship is not considered to be a partnership for Federal tax purposes. Everything business-related (income, expenses, etc.) is divided between the two people according to the percentage of ownership that each one has. Then these business items are shared as if both were sole proprietors.
This is complicated, yes, but if you and your spouse own a business together, these tax concepts are worth exploring if you are not already using them. In most cases, the beauty of dividing up everything between the two people is that their social security accounts receive credits for the social security earnings caused by this division. There are other tax benefits possible, as well.
A key point, however, is that both husband and wife must be involved in the running of the business. This applies whether the business is home-based or an enormous corporation like Cisco (a husband and wife business).
Once in business, you must pay withholding tax on income as well as social security and Medicare taxes for all employees (even wife or husband) regardless of the type of company it is. By not paying these taxes, you open yourself up to all types of trouble from the IRS. You must pay your taxes in order to stay in good standing with the government.
For advice on setting up a husband and wife business as well as legal and tax recommendations as the business grows, be sure to consult a good tax lawyer. He can help you work through the labyrinth of tax laws to make sure that you establish your business properly and legally. Setting up and starting off correctly are necessary for your future business success.
