Running a Business With Your Spouse

Your spouse can participate in your sole proprietorship -- a little.

If you are going into business for yourself and your spouse will help out a little, you don't necessarily need to hire your husband or wife as an employee or independent contractor, nor do you need to form a partnership, LLC, or corporation. If you follow certain guidelines, you can continue to operate as a sole proprietorship (a one-owner business).

You Can Still File a Joint Return

The IRS does not officially recognize any form of sole proprietorship that informally has two owners. However, you can maintain your sole-owner status even if you file a joint tax return with your spouse at the end of the year. On your joint return, simply list all of your business income on Schedule C. The IRS then treats all of your business income as belonging to both of you, and you'll have just one tax bill. While technically the IRS expects sole proprietorships to have just one owner, it's quite common for mom and pop businesses to operate this way.

When you use a joint tax return, your business still has just one formal owner for IRS purposes -- that is, whoever is listed on Schedule C and on the business registration forms you file with your city or county. That means you and your spouse don't have to form a partnership or deal with partnership taxes. The IRS also ignores the fact that, in most states, you and your spouse technically co-own the company because of marital property laws that give your spouse a property interest in your business.

If you and your spouse file separate tax returns, your tax return will show you as the sole owner of the business.

Employment Taxes

Your spouse can volunteer occasionally at the business without being classified as an employee, which frees the business from the expense of payroll taxes. This set-up not only saves you money but, if you have no other employees, it also allows you to avoid the time consuming record keeping that comes with being an employer. But be advised that volunteers don't rack up credit in their Social Security accounts for the time they spend working without pay. And, if the IRS does not accept your characterization of this work as "volunteer" -- for instance, because it is frequent and regular, or involves contact with the public or signing documents on behalf of the business -- you may be socked with back employment taxes and penalties, whether the IRS decides to characterize your spouse as a partner or an employee.

If you'd like to pay your spouse for services you might otherwise hire an outsider to do, consider hiring him or her as an independent contractor who pays his or her own self-employment taxes. This looks even better if your spouse already has a private business providing these services to others.

Choosing Equal Ownership

If you and your spouse both want formal ownership of your company, each with an official say in management and a distinct share of the business's profits and losses, you should create a business entity that allows two formal owners -- such as a corporation -- even though this will mean filing more complicated tax returns and other business paperwork. Having two official owners need not change the fact that, in practice, one of you continues to run the business, while the other only helps out occasionally. But it allows your spouse to participate as needed, without doubts about his or her status.

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