In the case of a family business or small business, it is not uncommon for a spouse to play a role in its operation. If you and your spouse are starting a business in Wyoming, you may want to consider forming an LLC together. In the alternative, if you have already set up your business as an LLC entity, you might consider making your spouse a member of the LLC. This practice can help limit the personal liability of both you and your spouse. Without taking this safeguard step, your spouse may incur liability through their actions and involvement with the business. When this occurs, the liability protection of an LLC is defeated because any joint assets could be subject to legal judgments.
Determining the LLC Role of Your Spouse
If from time to time your spouse contributes to your business, doing so on an inconsistent basis, there is likely no reason to worry about liability matters. However, if your spouse plays a consistent role in your business operations, you might want to consider making your spouse a member of the LLC. Some examples of when to consider this step include if your spouse:
- Consistently takes part in business operations.
- Receives payment for the work they contribute.
- Conducts public business on behalf of the LLC.
If the work your spouse performs for the LLC falls into one of the following categories, they may be subject to personal liability:
To determine independent contractor status, consider if the LLC holds the right to control the operating method and work result of your spouse. Independent contractors can be personally liable because they are not considered employees.
LLC members receive personal liability protection from actions related to job function. However, if an employee’s actions are independent of their job’s function, then employee liability can occur. Personal liability can occur for a spouse if any of their actions are taken beyond the scope of their employment.
In a general partnership, the partners are liable for any debts incurred by the business. With this in mind, if your spouse is considered a general partner of your business, personal liability comes with the role.
LLC Tax Considerations with Your Spouse
There are also tax implications to consider when forming an LLC with your spouse, as your LLC income tax will be based on personal salary and business profits. If you are forming an LLC with your spouse as the only member, then you have the option of a sole-proprietorship. If the LLC will have multiple members, then you have the option of classifying as a partnership or corporation.
With a partnership, you will not file a return for your LLC, but rather report profits and losses on your own personal tax return. Because you have formed the LLC with a spouse, you are allowed to separate income streams, expenses, and tax credits in proportion to the percentage each spouse owns in the LLC.
With an LLC, you can choose either a C-corporation or S-corporation classification. C-corporations file a separate tax return, in addition to a personal return. In this scenario, you will end up paying tax twice on your dividends (once for the LLC and again as a member). S- corporations, on the other hand, pass income through to the owner, so that it is reported on your personal return, similar to a partnership.
Watch for certain complications that could arise from a participating spouse. For example, if your spouse receives compensation for services, it is possible that the IRS would classify the spouse as an employee. In this case, the IRS could issue penalties for failing to pay payroll taxes, unemployment insurance, and more. If you are uncertain how to classify the role of your spouse, seek advice from an attorney or tax accountant.
The members of an LLC are not considered to be its employees. Instead, they are considered self-employed individuals, therefore, the LLC does not withhold their taxes. Consequently, each member of the LLC must estimate how much their tax burden will be for the year and submit payments to the IRS (and the necessary state taxing authority) quarterly starting in April.
LLC and Self-employment Taxes
The beginning steps of forming your LLC consist of selecting a unique name for your company and designating a registered agent. The name you choose must not be in active use by any other business in the state of Wyoming. For your registered agent, you must choose a resident of the state over the age of 18 that is available to receive legal notices on behalf of your LLC during regular business hours. Then, you must file articles of organization for your LLC with the state.
Once your articles of organization are accepted by the state, your LLC has been formed. The next step is to create an operating agreement for your LLC. The operating agreement serves as a contract between you and your spouse that determines the management plan of the company, ownership stakes, and other specifications. For example, if in the future you decided to buy your spouse’s stake in the company. Ownership agreements can be designated in any way you choose, whether a 50/50 partnership or designating the spouse as an LLC employee. Regardless of how your ownership is structured, your LLC will need an Employer Identification Number from the IRS. An EIN can be obtained through the IRS website.
Making Your Spouse an LLC Member
If your spouse maintains a consistent role at your LLC, consider making them a member of the LLC. This can be a helpful step to ensure that liability is avoided. By following the terms laid out in your operating agreement, an LLC has the option of adding new members. Though operating agreements differ with each company, in general, a new member is allowed when current members agree to it. Once the new member is added, the operating agreement must be amended to reflect changes in member interests in voting, profits, and more. For assistance with drafting or amending your LLC’s operating agreement consider enlisting the assistance of an attorney that specializes in LLCs.
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