single member LLC -- in husband's or wife's name?

Question

Just thought I'd run this by everyone:

Husband has a day-job and wife manages the rental properties but does not draw a W2.

In setting up the LLCs, are there any pros/cons to setting things up in one name or the other? We file taxes jointly, so all profits go against hubby's income, no matter whose name is on the LLC.

Are there any other considerations before I pull the trigger?

Thanks!

Tatsiana Zhydkevich · Answer

If you choose to be taxed on 1065 partnership return (multi member LLC) IRS penalties if there any will be calculated for both partners.

Dave Toelkes · Answer

Even if husband is the only one earning a salary, you can still have a "spousal" IRA.  Talk to your favorite IRA custodian about a spousal IRA and the limits on contributions.

Keith Barton · Answer

One of the main goals of forming an LLC is to have protection against legal/financial liability. Piercing the corporate veil is a method by which someone can show the owner of an LLC should not be given the traditional protections. There are many reasons for disallowing the normal protections, but my point is to have the most protections, you must follow the formalities as closely as possible. If one person of the couple does most of the work in the business and the other person has a W-2 job, it might be best to put the LLC in the name of the person who is doing the work.

If you really want to get creative (both with liability protection and with tax treatment) you will have multiple entities with different agreements between the entities (e.g., assets owned by 1 or more LLCs, management company that is a corporation, limited partnership in the family that is an umbrella entity for the others, revocable trust to eliminate probate, etc....)

Delin W. · Answer

Charles:

Thank you for that post. You have cleared a few things up for me. The fact that some of the CPAs in non-community-property states are having no issues is likely due to the fact that, as you say, no monies would be gained by correcting the error. Aha! That makes perfect sense.

And about the 401k, that makes sense also... if I have cash from the rentals in the bank, yet I claim a loss due to mortgage interest, depreciation and operating expenses, there is no room for earned income / 401k even though my cash position is positive.

(You can probably see the division of tasks in the household by my posts... I run day-to-day and husband handles the yearly stuff!)

Thank you for commenting.

Account Closed · Answer

Delin Wareham, A husband and wife in a community property can be treated as a single member LLC  under Rev Procedure 2002-69, 2002-2 CB 831.  The operative word here is can be.  There are advantages and disadvantages to being a single or multi-member LLC that all must be considered.

I've run across this issue on a number of occasions.  A husband and wife can be treated as a sole prop if they do not form an LLC.  If they form an LLC they will be considered partners and an exception exists in community property states.  The IRS doesn't always audit when they find errors especially if there will be no net tax revenue gained from an audit.  This doesn't change the fact that a husband and wife LLC generally are to be treated as multi-member LLCs thereby required to file a 1065 partnership return.

How you proceed is up to you.

I forgot to mention earlier that you need to have active income in order to qualify for a qualified retirement account.  You can qualify if the wife is a real estate professional, you are flipping properties or otherwise creating active income.

Delin W. · Answer

From what I am reading, you are both right. (!!)

For the state (which is who you set up an LLC with), you can be either a single- or multiple-member LLC. In community-property states (I am not in one), a multi-member husband/wife LLC is treated by the IRS as a "sole proprietor" entity, ie a single taxpayer. This means that your rental income goes against one member's regular income and you don't need to prepare any other returns. Nice; wish I were in one of these states.

For the rest of us, it appears the regulations are unclear and how to file taxes are a matter of healthy disagreement in CPA forums.

Many CPA posters treat H/W rental teams as a "sole proprietor" to the IRS, as above, even in non-community-property states, and they are not reporting any issues. I am trying to figure out if it's worth it to try...

Others says that is technically incorrect and that two+ members make it a partnership and you must file the 1065/K-1s.

Still others say you are indeed a partnership, but with regard to rentals, you can elect to be taxed as a Qualified Joint Venture, which essentially moves you back to the "sole proprietor" categories. (At least that 's my understanding.)

ANYWAY, I am going to assume for the moment that either avenue ought to work (I really don't want to get bogged down in the deep technicalities here) and it depends on how your CPA wants to proceed.

I'm looking for any practical advice about how to shelter profits and avoid a big hit on income tax.

Account Closed · Answer

As an owner in the business the wife would be able to contribute to a 401K plan or perhaps a defined benefit plan.

Account Closed · Answer

Actually, Nathan Emmert that is not the case.  A husband and wife  can form a partnership or a multi-member LLC.  It is probably somewhat better than a single member LLC.  Because the parties are closely related though it is going to be easier to go after personal assets and bypass the protections of an LLC.

Nathan Emmert · Answer

My understanding is as you are married filing jointly... putting the LLC in both your names is essentially still a single member LLC.  I'd put both on their just in case something were to happen to one.

Delin W. · Answer

PS For example, husband currently maxes out 401k... would an LLC in wife's name be an opportunity to create/contribute to another 401k?