Setting Up a Business for Spouses: Steps to Take

The decision to start a business can be a hard one. There are many factors to consider, including the financial risks, the long days, and the stress that business ownership entails. Going into business with a spouse can be even more challenging. Not only are the risks doubled, but there are many unique financial and legal guidelines to navigate. 

But as they say, no risk, no reward. And the rewards for going into business with a spouse can be numerous. Running a family business is a time-honored tradition that can provide financial security for generations to come. And I should know — I started my first business with my husband, Phil, nearly three decades ago!  

As an accounting professional, your role in helping spouses set up a business is pivotal to its success. The financial and legal dynamics are more complex than a typical business setup, but doing it correctly from the get-go will help prevent unnecessary complications down the road. Following are some steps to take.   

Determine the business’s legal structure

The first step in setting up a business for spouses is determining the right business structure. The structure will depend upon the clients’ risk tolerance and long-term goals. A summary of common structures follows.  

Sole Proprietorship:

In community property states, married couples filing a joint return can elect to be considered sole proprietors if they operate a Qualified Joint Venture (QJV). The benefits of a sole proprietorship for couples include simplicity and tax savings. However, certain conditions must be met, including the following:  

• The only members of the joint venture are the married couple. 
• The couple must file a joint tax return.  
• Both spouses must materially participate in the business, meaning they must each be regularly, continuously, and substantially involved. 
• Both spouses must elect not to be treated as a partnership.  

Partnership: 

Traditional partnerships are ideal for couples who do not live in community property states or for those who do not qualify for the QJV election. Partnerships allow for pass-through taxation, allowing profits and losses to be reported on personal returns.  

Limited Liability Company (LLC):

LLCs offer personal liability protection for spouses while allowing for simplified tax filings. As an LLC, they can choose S-Corp status to benefit from pass-through taxation with reduced self-employment taxes.  

Corporation:

Traditional C Corporations are designed for growing companies that may be seeking outside investors. C Corps can also elect S Corp status for taxation purposes. However, corporations undergo more regulatory scrutiny than other entity types.  

Address the financial details 

As a trusted financial partner, you are appropriately positioned to help new business owners shape the future of their business. You can do so by helping your clients set goals, establish budgets, and forecast revenue. You can also advise them to seek legal help in creating Partnership Agreements, in which the roles and responsibilities of each spouse are clearly outlined. These agreements also spell out how profits and losses are to be divided and how salaries will be distributed.   

File the required paperwork 

Setting up a business involves a considerable amount of financial and legal paperwork. Although the specific requirements vary from state to state and depend on the business entity type, they typically include the following:  

• Designating a registered agent 

• Obtaining an EIN 

• Submitting an Initial Report 

• Filing a DBA (Doing Business As) 

• Applying for a business license 

• Registering for payroll taxes 

• Registering for sales and use tax 

• Appointing a board of directors (for corporations)  

Similarly, new businesses will have numerous ongoing compliance obligations to fulfill, including filing annual reports, reporting and paying taxes, and renewing licenses and permits, among many others. This ongoing compliance work can be done in-house or in partnership with a third-party vendor. CorpNet, for example, offers a full suite of business filing services.  

Setting up a business for spouses 

Supporting your clients in their business and financial endeavors goes beyond tax preparation. As a trusted accounting professional, you are uniquely positioned to guide them in setting up a business. Understanding the nuances of setting up a business for spouses is essential and taking a proactive approach not only ensures compliance, but it also positions you as a trusted expert dedicated to your client’s long-term success. 

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