My Wife and I are going into business together

by Scott
(Ky)

My father owns a small counseling service (llc) that my wife and are going to be taking over. How should we set this up? Should it be under one of our names and pay the other one a salary (1099) or should we go into it as a partnership. With that, how should we file our taxes under each scenario. Up to this point we have always filed jointly.

-Thanks!

Answer

If the business is already an LLC, then you and your wife would purchase the membership interests from your father.

If you both own the LLC, then, because you are husband and wife, you setup your LLC as a disregarded entity and simply file your taxes on your joint 1040 return, Schedule C.

Record all your LLC's income and expenses on your schedule C. You will then have to file self-employment taxes as well.

I recommend that if you don't already have an accountant (and I mean a "real" accountant, not the guys with a H&R Block booth at Wal-Mart), then you ought to get a good small business tax package.

TurbTax Online has a special edition just for small business owners who use Schedule C, called the "Home and Business" edition.

As an LLC owned by husband and wife, you will be filing like a single member LLC / sole proprietor using Schedule C.

If you're not already using accounting software, get some. An old version Quickbooks can be picked on Ebay cheap. You need to keep track of all your income and expenses to take the maximum deduction you can and minimize taxes.

The other method is to have you own the LLC and then 1099 your wife. If you're filing joint tax returns, I don't see the advantage. You're not going to avoid self employment tax, and you're not going to avoid income tax. My initial read is that you, as a couple, will pay the same amount of taxes either way (though 1099ing your wife will involve more paperwork).

With the LLC owned by you and your wife, there is better protection against your personal creditors. If you were to own the LLC 100% yourself, and you were sued personally, the creditor could take control of the LLC to satisfy the debt.

On the other hand, if the LLC is owned 50-50 between you and your wife, the best your creditor could do is get a charging order against the LLC, and you wife could freeze out the creditor from recovering any money by refusing to make payouts of profits.

Good luck with your new business!