You're reading

USTaxCenter

Small business structures for couples

 

Small business structures for couples

What are the differences, and which is better for your small business?

Brandon Lafving
by Brandon Lafving, IRS contributor (@TechDragoon)

Elsa and Bill are recently married and considering whether to ‘marry’ their sole proprietorships into one business. They are unsure how their taxes will be affected. Will it be more difficult to file as a partnership? Would a qualified joint venture be better? And how would their overall tax burden be impacted by the decision?

READ: Tax preparation for businesses

Sole Proprietorships

Sole proprietorships are the simplest form of business entity. For tax purposes, the business’ profits or losses are entirely tied to the owner. This means the owner has the only say in managerial decisions. Many firms – even if they only have a single owner – choose other business structures due to the high risk associated with some lines of work. Businesses that could potentially result in property damage or personal injury, such as roofing companies, generally form a Limited Liability Company (LLC) to separate personal assets from the business. In the event of an accident, the business records the loss and can file for bankruptcy without forcing the owner into Bankruptcy Court.

As a sole proprietor, you do not have this shield in place, but your taxes are simple by comparison to larger entities. Every year, you fill out Form 1040. If you have employees, you might be required to file Form 941, 943, or 944: a process as straightforward as business taxes can be. Joining forces as a couple can potentially complicate your taxes.

Accounting Requirements for Partnerships

As a business entity, a partnership is an unincorporated organization with two or more partners. All partners carry on a trade, business, venture or financial operation, splitting up the profits or losses in accordance with their shares of the business.

Partnerships are typically defined as an entity in which each partner has partial managerial control. So, if Elsa and Bill planned on having equal weight in the business decisions, then they would each lay claim to 50% of the business. This does not mean they would claim equal shares of the company’s revenues, however. Each would continue to be compensated for his/her work, individually.

If Elsa performed $36,000 in services; Bill performs $10,000; and the partnership claimed $50,000 in total profit, then Elsa would claim $36,000. Bill would claim $10,000. And both would share the remaining profits equally.

$50,000-($36,000+$10,000)=$4,000
$4,000/2=$2,000 profits for each partner

This is just one of many other accounting requirements for partnerships. Partnerships are required to complete Form 1065, including balance sheets and bookkeeping. Married couples who want to join businesses but keep their taxes simple can choose to engage in a qualified joint venture.

A qualified joint venture is a collaboration on business and taxes. The business’ only members are the married partners, and both spouses must choose not to be treated as a partnership. The more complicated Form 1065 can be omitted, and instead, both parties fill out sole proprietor Form 1040s.