Edward F. Younger
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LLC & Your Spouse

EIN & Your Spouse

Your spouse can be an employee, an independent contractor, or a member of your LLC (limited liability company).

If you own a single-member LLC, you can run into liability and tax headaches if your spouse helps out regularly.

As a practical matter, spouses can help out in a small family business without getting into any legal hot water, as long as they pitch in informally, infrequently, and without being paid. However, you really should add your spouse on as a member (co-owner) if any of the following are true:

Your spouse is being paid.
Your spouse helps out regularly.
Your spouse is very involved with your LLC.
Your spouse interacts with the public or your business contacts on behalf of the LLC.
A Participating Spouse Might Have Personal Liability
Probably one of the main reasons you chose to do business as an LLC was to protect your personal property from liability for business debts. This is a major advantage of the LLC business structure over the sole proprietorship. But if your spouse is involved in your business, your spouse might not get this benefit of the LLC business structure, and could be personally liable for business judgments and debts.

There are several ways that the law might view your spouse's position in your LLC, and each has different consequences for both you and your spouse. Here are a few of the possibilities:

Agent. Your spouse could be viewed as an agent of the LLC. The LLC is typically responsible for authorized actions by its agent. However, the LLC structure usually protects the owners' personal property from claims related to an agent's acts. The agent (your spouse) also would not be personally liable for his or her actions, as long as they fell within the scope of his or her authority to act for the LLC.
Employee. Your spouse could be viewed as an employee of the LLC. An employee is personally liable only for certain extreme and unauthorized acts, such as assault or other criminal behavior. The LLC structure should protect your personal property from liability for the acts of an employee. (But the IRS could come after you for back payroll taxes, withholding, and penalties -- see below.)
An independent contractor. Your spouse could be viewed as acting as an independent contractor. An independent contractor could be held personally liable for just about anything he or she does. That means that although the LLC protects your own personal property, your personal marital property and your spouse's personal property could be at risk.
A general partner. Your spouse could be treated as an individual who has gone into a general partnership with the LLC. As a general partner, your spouse would have personal liability for business debts.

Any scenario in which your spouse has personal liability is a bad one, because a successful claimant might try to collect a judgment from your spouse's personal property -- which will usually include your jointly owned personal property, such as bank accounts and your house.

One way to avoid these possibly negative characterizations is to make your spouse an LLC member (co-owner). An LLC member can pitch in as much or as little as the members agree, and the LLC protects each member's personal property from business liability. See " How a Spouse Becomes an LLC Member," below.

A Participating Spouse Could Create Tax Liability
The degree to which your spouse participates in the business could also affect your tax obligations. If your spouse chips in very occasionally and isn't paid, you probably won't have any tax issues to worry about.

However, if your spouse works regularly for the business and receives compensation, the IRS could decide that your spouse is an employee. If you haven't been following the rules that apply to businesses with employees, the IRS could come after you for back payroll taxes, withholding, and penalties.

How Your Spouse Can Avoid Liability
There are a couple of ways to avoid these problems: the simplest is just to make your spouse a member of the LLC (see below). Or, if your spouse is not worried about personal liability, you could hire your spouse as an independent contractor, who is responsible for paying his or her own income and self-employment taxes.

You can make your spouse an official employee from the get-go, but it may not be worth the paperwork and record-keeping hassles unless your LLC already has other employees. For any employee, the LLC must withhold taxes, report state and federal income tax, report and pay employment taxes, pay workers' compensation insurance, comply with workplace-safety reports, and (in some states) pay unemployment insurance.

The information on this site is not, nor is it intended to be, legal advice. Please contact us to obtain legal advice pertaining to your situation.