If your spouse has an active role in your business, you may want to consider utilizing an LLC structure for additional benefits and to avoid having a Single Member LLC. By forming the LLC with your spouse as a member, you can limit the potential liability you and your spouse are exposed to. Without this safeguard, your spouse may incur liability through the role they hold in the business. If your spouse becomes subject to legal judgments, then any joint assets you share do, as well. So, by not bringing your spouse into the liability protection offered by the LLC, in many ways it defeats the protections altogether.
The Business Role of Your Spouse
It is important to determine the role of your spouse in the business, so that you can effectively limit your exposure to liability. For example, if your spouse contributes to the business from time to time on an inconsistent basis, then there is likely no reason for you to worry about your spouse’s liability. However, if the role is a consistent one, you will want to consider making your spouse a member. Consider if the role your spouse plays falls into one of the following categories:
Independent Contractor: Does the LLC control the operating method and work result of your spouse? If so, then your spouse may classify as an independent contractor, which can be found personally liable.
Employee: Members of an LLC receive liability protection from any actions related to their job function. However, if any of those actions are deemed outside the scope of their role, then the employee could be found liable.
General Partner: In a general partnership, partners can be found liable for debts incurred by the business. Consider forming an LLC with your spouse as a member to limit your personal liability.
LLC Tax Considerations with Your Spouse
Be sure to consider the tax implications of forming an LLC with your spouse, as your income tax will be based on your LLC personal salary and profits. When forming an LLC with your spouse, the business structure you choose will impact your taxes.
Partnership: In a partnership structure, you are not required to file a return for your LLC, but rather report profits and losses on your own personal tax return. Forming the LLC with a spouse allows you to separate income streams, expenses, and tax credits in proportion to ownership percentage.
Corporation: With a corporation, you will be required to file a separate tax return. This process is known as double taxation, in which you end up paying tax on your LLC dividends and then again as a member. However, with an S-corporation classification, the income passes through to the owner much like a partnership or LLC.
Be aware that if your spouse receives compensation for any services performed for the LLC, it is possible that the IRS will classify your spouse as an employee of the LLC. In this event, the IRS may issue penalties for failure to pay payroll taxes and unemployment insurance, among other issues. If you are uncertain if this applies to your situation, seek the advice of an attorney.
Form an LLC with Your Spouse
To form an LLC with your spouse, you will need to select a name for your company, designate a registered agent, and file articles of organization with the Florida Division of Corporations. The name of your company must be unique from other active entities in the state. Additionally, your registered agent must be a resident of Florida that is available for receipt of legal notices during normal business hours.
Once you have filed your articles of organization and your LLC has officially been recognized by the state, your next step is to draft an LLC operating agreement. Your operating agreement will serve as a contract between you, your spouse, and any other members of the LLC. The agreement will determine your company’s management structure, ownership stakes, voting interests, and more. With an LLC, ownership arrangements can be designated in any way you desire.
Make Your Spouse an LLC Member
If you have determined that your spouse plays a consistent role in your business, consider adding them as an LLC member to limit liability to enjoy the above benefits. To add a member to your LLC, follow the terms laid out in your LLC’s operating agreement. While operating agreements may differ slightly with each LLC, generally, new membership is allowed when the other members agree to it. Simply update your operating agreement once your spouse has been added to reflect new member interests. If you require assistance with amending your operating agreement, enlist the assistance of an attorney.