If you are going into business for yourself and your spouse will help out, you don’t need to hire your husband or wife as an employee or independent contractor, nor do you need to form a LLC or corporation. If you follow certain guidelines, you can continue to operate as a sole proprietorship (a one-owner business).
Filing a joint return
If your spouse will participate in your business, you can maintain your sole-owner status by filing a joint tax return at the end of the year. On your joint return, you simply list all of your business income on Schedule C. (If you need to learn more about tax basics, read How sole proprietors are taxed.) 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 is quite common for mom and pop businesses to work this way.
Filing a joint return allows you and your spouse to own a business without forming a partnership — and dealing with more complicated partnership taxes. Also, it permits your spouse to provide services for the business without being classified as an employee, freeing 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.
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. But keep in mind that, in most states, you and your spouse each own part of the company because marital property laws give your spouse a share in your business.
Filing separate tax returns
If you and your spouse file separate tax returns, your spouse can still participate in your sole proprietorship. Your spouse simply does “volunteer” work (without pay) for your business. But be advised that volunteers don’t rack up credit in their Social Security accounts for the time they spend working without pay.
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 that allows two formal owners — such as a partnership, LLC or corporation — even though this will mean filing more complicated tax returns and other business paperwork.