Starting a business with your spouse is a big deal, personally and professionally. So it’s best not to make it more difficult by choosing the wrong business entity type.
A limited liability company (LLC) is a popular choice, and the formation process is the same for a husband and wife as it would be for any other partners. But there are some nuances you should be aware of, including all-important tax considerations.
This guide explains all you need to know about forming an LLC with your spouse and whether it’s the right move for your business.
How to Form an LLC
1. Name Your LLC
Naming your business can be challenging. You want a name that’s unique and easy to remember and conveys what your business does. You also want it to be SEO-friendly, so it can easily be found on Google. To choose a name, you might try a few different methods:
- Ask people you know for suggestions
- Use an online business name generator
- Brainstorm some ideas and ask family and friends for their opinion
Your business name is your business identity and the first impression people will have of your company, so take care with this step of the LLC formation process.
Once you have a few business name ideas, you’ll want to ensure they’re available. So first, do a business name search on your state’s relevant website, usually the Secretary of State. Next, check your state’s LLC naming regulations to ensure you comply.
You should also make sure the name is not trademarked. Check with the US Patent and Trademark Office to confirm the name is available nationally.
Finally, check if the domain name is available on a site like GoDaddy. You’ll want a .com domain name, rather than .org or .co, to give your business more credibility.
Once you know it’s available, you can reserve the name with your state using their name reservation form.
2. Select a Registered Agent
Most states require LLCs to appoint a registered agent, a person or company authorized to accept official correspondence on behalf of your business, such as legal, tax, or financial documents. A registered agent ensures all required notices and documents are received.
In most states, a member of the LLC can be the registered agent, or you can choose an individual that meets your state requirements. Generally, the requirements are that the registered agent:
- Be 18 years or older
- Have a physical address in the state
- Be available during regular business hours
- Be registered to operate in the state, if the agent is a business
Some states have more specific requirements, so check the rules in your state.
Many business owners hire a registered agent service to ensure all important documents are received and addressed promptly. A registered agent service also offers convenience.
If you choose to be your registered agent, you’ll have to be available at your registered agent’s address during regular business hours. However, a registered agent service will allow you the flexibility to run and grow your business wherever you need to be.
3. Determine Your Management Structure
Members or managers can manage LLCs. In a member-managed LLC, members handle all management duties. In a manager-managed LLC, non-member employees oversee operations and management duties.
Note that with a manager-managed LLC, a member can be a manager, but only in cooperation with another manager who is not a member.
Member-managed LLCs generally work best for LLCs with few members, all of whom can take an active role in day-to-day operations. Conversely, manager-managed LLCs are best for LLCs with multiple members, some of whom want to be “silent” or passive members and not involved in day-to-day operations.
Most LLCs are member-managed, as they are small businesses that cannot afford a management team.
Some states require that when you register your LLC with the state, you declare whether your LLC will be member- or manager-managed, so be aware that you may need to make this decision before you file.
Discuss with your spouse and work with an attorney to decide which management structure is right for your business. It’s a good idea to formally document your roles and responsibilities in an operating agreement, which we will discuss in a few steps.
4. File Necessary Documents with Your State
In most states, the document you file to form an LLC is called the articles of organization. In some states, it’s called a certificate of organization or formation.
Generally, you can file the document online, usually on the Secretary of State’s website. The document requires your business name, address, registered agent information, and member information.
Filing fees vary by state and range from $40 to $500. Depending on the state, your LLC should be approved within a few weeks of filing.
Some entrepreneurs use an LLC formation service like ZenBusiness to handle this step. It saves time and ensures the process is done correctly.
5. Determine Your Tax Status
When starting an LLC with your spouse, you have a few options regarding tax status. First, as mentioned above, LLCs are pass-through entities, which means income passes through the company to the members.
If you form an LLC with just one member or owner, it’s taxed as a sole proprietorship. However, if the LLC has more than one member, such as a husband and a wife, it’s taxed as a partnership.
But LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. By filing an election form with the IRS, you can be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation.
However, members are subject to self-employment tax in an LLC taxed as a sole proprietorship or partnership. The IRS allows married owners to divide income, expenses, and tax credits according to their ownership percentages.
But if the LLC switches to being taxed as a corporation, self-employment taxes no longer apply. Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of S-Corp status.
Also, under S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. As a result, S-Corp status is only beneficial when the self-employment tax savings are more significant than the additional expenses.
6. Draft an Operating Agreement
Most states do not require an operating agreement, but it is essential. It defines the ownership percentages of members and how profits and losses are distributed. Those are the most important elements of the operating agreement, but it should also include the following:
- Each member’s rights and responsibilities
- Management structure and roles
- Voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved.
Working with an attorney can also help you and your spouse draw up rules around what happens to the LLC should one of you pass away or should the two of you get divorced. For example, in a divorce, unless the operating agreement states differently, the court will divide the LLC equally between both parties.
7. Get Your Employer Identification Number (EIN)
The IRS uses an EIN to identify your company. It’s used for tax filing purposes. An EIN is required if your LLC has more than one member or hiring employees. Obtaining an EIN requires applying on the IRS website.
The IRS rules for obtaining an EIN are as follows:
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the ‘responsible party,’ controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
8. Obtain Business Licenses and Permits
Depending on the nature of your business, you may need to apply for licenses and permits at the federal, state, and local levels.
At the federal level, licenses and permits are generally industry-specific and may include health licenses and permits from the Occupational Safety and Health Administration (OSHA).
You may need a general business license to operate at the state level. If you sell tangible goods or services subject to sales tax, you’ll need a sales tax license, also known as a seller’s permit.
Check the SBA guide for specific licenses required for your business. Here are some standard licenses and permits you may need:
- Industry-specific licenses for certain professions and industries, such as construction, plumbing, electrical, childcare, food handling, liquor, architecture, and finance
- Building and zoning permits
- Doing business as (DBA) permits using a name other than your LLC.
- Health licenses and permits at federal, state, and local levels
- Fire permits
- Sign permits
This is a significant step in the LLC formation process, so check with your state and local government offices to find out all the licenses and permits you need. You could face steep fines and penalties if you operate without the proper licenses and permits.
If you need help, it’s a good idea to consult a business attorney to ensure you’re in full compliance. You can also use a service like MyCorporation to do the research and provide you with all the forms you need to license your business.
9. Open Your Business Bank Account
When you have an LLC, keeping your business and personal finances separate for accounting and tax purposes is essential. Co-mingling your business and personal funds can threaten your liability protection since the line between business and personal assets will need to be clarified.
Most banks offer business bank accounts, so check with your local bank. You’ll need your EIN and a copy of your articles of organization. Your bank may require other documents as well.
10. Get Business Insurance
Insurance is the right choice to protect the investment you’ve made in your business. There are several different types of insurance you may need.
- General liability: A comprehensive type of insurance covering many business elements. It includes coverage against bodily injury and property damage.
- Professional liability: Protects against claims from a customer who suffered a loss due to an error or omission in your work. It’s also known as errors and omissions (E&O) insurance.
- Workers’ compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical business space.
- Business Property: Covers equipment and supplies.
- Equipment Breakdown Insurance: Covers repairing or replacing broken equipment due to mechanical issues.
- Commercial auto: Covers your company-owned vehicles.
- Business owner’s policy (BOP): This option combines the above insurance types.
11. Annual Reporting
Most states require you to file an annual or biennial report to verify you’re still doing business. These can generally be filed online. A small fee usually applies and varies by state.
Starting a business with your husband or wife is exciting, and the LLC formation process must go as smoothly as possible. Consider consulting an attorney and tax advisor to ensure all your bases are covered and your business gets off on the right foot.
You could also use an LLC formation service to handle your state filings and act as your registered agent. The service will ensure that you comply with all regulations.