Is it possible to create an LLC for a husband and wife and not pay self-employment taxes?

3 Replies

Hi BPers-

I want to create a business name that is separate from my wife's and my name.  I primarily want this to serve two functions - 1) so our tenants do not know that we are the 'big, bad landlord' and 2) be able use this name to grow a property management business in the future.  

The two options I've looked into-LLC or DBA- both appear to have some drawbacks. The LLC, if set up as a property management company, appears to make our rental income further taxable through self-employment taxes. The DBA doesn't allow us to have the sole right to use our business name.

Is there a way to set up an LLC so that our rental income isn't further taxable? If not, is there some other option or entity that would allow us to be the only business to use our business name? Right now, we aren't concerned about asset protection through the LLC-we have an umbrella policy and only own a few properties.

Thanks in advance for your help!

Unless you elect special tax treatment an LLC will have no effect on your taxes at all. Its a "pass through" entity and the income or losses flow directly to your personal return. LLC's provide asset protection, not tax effects.

Rental income isn't subject to self employment tax in any case.  It is subject to ordinary income tax.  

I highly recommend finding an accountant who's experienced with real estate.  Its complicated.

Careful planning with an accountant can help you avoid the employment tax issue. 

Some ideas that come to mind:

-A carefully crafted operating agreement that calls for the active spouse to be the sole managing member and the inactive spouse to be nothing more than an equity member only can add an argument for a passive LLC member, and thus, some wiggle room for exemption from employment tax. This is treading in unprecedented waters from a case law and regulation standpoint. Not a whole lot out there to rely on as LLC's are still fairly new in terms of tax court holdings.

-The above issue could be rendered moot if you have enough operating and administrative costs of maintaining a large portfolio of rentals. These costs could offset the management fees you charge your portfolio, thus resulting in a net effect. There could also be room for incorporating the management company to protect against employment tax in the event there is a profit during the year. We do get into fair compensation issues, etc. but it will still minimize the effect quite a bit than leaving the company as a simple pass-thru LLC.

Several ideas available here and with careful planning you can get what you want, ethically and legally.

Nathaniel Busch, CPA

Thanks for the responses! I'm going to just set up a DBA to avoid any legal or tax implications.

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