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Can We have single member LLC with only one spouse in CA

Forum|Forum|6 years ago
January 25, 2020
9 replies
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We are a husband and wife LLC in CA started last year and elected S corp. We have dump truck business and working with a different company who uses their driver, find work for our truck and maintains the truck. We don’t have much involvement. I’m just entering numbers in quickbooks at the end of the month once they send me the statement which doesn’t take much time, may be couple of hours max.

Since we both are not working materially for our business, thinking of revoking the S election so we don’t have to take salary. If I take too little salary based on the work I’m doing, it seems high probability of getting audited.

We both have full time job. My W2 income maxing out social security taxes but not my wife’s as she is working part time.

Can I revoke S corp status and choose single member LLC with just me as a member even though we are in a community property state? This way only I have to report business income and don’t have to pay social security taxes as I’m maxing it out in my full time job. With this arrangement can we still file joint return? BTW, wife is okay with not being on the LLC.

If this is not possible, can we change the llc share to 95/5 so wife is only paying social security taxes on very small amount?

How do I go about making this change? Just update statement of information or do I need to send any new forms to state to remove my wife as member of LLC?

The only asset we have is a dump truck which is financed through the dealer. Would revoking S corp affects anything in terms of assets?

Not A Product Question

Best answer by jtax

Expert Reviewed

Be careful. @Carl11_2 answer is correct for the 41 states that are not community property states, but it is not right for community property states like CA.

This is involved enough that it is probably a very good idea to seek profession advice rather than relying on a volunteer public form.

https://www.nolo.com/legal-encyclopedia/taxation-llcs-owned-spouses-community-property-states.html

says

From almost every perspective, it’s accurate to say that a single-member limited liability company (SMLLC) has only one member. After all, that’s why it’s called a single-member LLC. However, in community property states, you can have an SMLLC with not one but two members—or at least have a two-member LLC that’s treated like an SMLLC for tax purposes.

If you’re married, you probably know if you live in one of the nine current (2014) community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. These states have laws stating that property acquired by a married individual is owned in common with that individual’s spouse. Those laws can extend to profits from an LLC owned solely by two people married to each other.

The IRS has issued a special rule applicable to LLCs owned by married couples who live in community property states. Under this rule, a married couple can treat their jointly owned business as a disregarded entity for federal tax purposes if:

the LLC is wholly owned by the husband and wife as community property under state law
no one else would be considered an owner for federal tax purposes, and
the business is not otherwise treated as a corporation under federal law.

In most cases, this would mean that the spouses would file a joint tax return (with the general tax savings that come with such a return), and include with that return a Schedule C, and any other relevant schedules (Schedule SE, Schedule E, and so on), for their business. For all practical (tax) purposes, they would prepare their taxes as though their LLC were an SMLLC. This includes same-sex couples who are legally married under state law.

Carl

Level 11

Bottom line here.

A single member LLC can only have one owner. It does not matter if that one owner is married and will be filing a joint tax return either. As the owner of a single member LLC, under no circumstances and with no exceptions will the owner of that business ever issue themselves a W-2, 1099-MISC or any other type of tax reporting document. Again, there are no exceptions.

The IRS considers a single member LLC to be a disregarded entity. All income and expenses for the business are reported on SCH C as a physical part of the personal 1040 tax return, and it doesn't matter if that tax return is a joint return either.

C

CA-businessAuthor

Level 2

Thanks for the quick reply, Carl!

My understanding after reading irs/ftb site was in CA married owner can choose to file as single member llc and business income will be divided between husband and wife. They’ll fill separate schedule C and SE.

I’m just trying to avoid this situation where we have to pay self employment taxes especially social security part (12.4%) on my wife’s share if I can claim the whole business income on my SE.
I can’t find a clear rule or explanation about the division of business income for husband and wife. Is it always going to be 50/50 in community property states?

J

jtax

Answer

Level 10

Expert Reviewed

Be careful. @Carl11_2 answer is correct for the 41 states that are not community property states, but it is not right for community property states like CA.

This is involved enough that it is probably a very good idea to seek profession advice rather than relying on a volunteer public form.

https://www.nolo.com/legal-encyclopedia/taxation-llcs-owned-spouses-community-property-states.html

says

From almost every perspective, it’s accurate to say that a single-member limited liability company (SMLLC) has only one member. After all, that’s why it’s called a single-member LLC. However, in community property states, you can have an SMLLC with not one but two members—or at least have a two-member LLC that’s treated like an SMLLC for tax purposes.

If you’re married, you probably know if you live in one of the nine current (2014) community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. These states have laws stating that property acquired by a married individual is owned in common with that individual’s spouse. Those laws can extend to profits from an LLC owned solely by two people married to each other.

The IRS has issued a special rule applicable to LLCs owned by married couples who live in community property states. Under this rule, a married couple can treat their jointly owned business as a disregarded entity for federal tax purposes if:

the LLC is wholly owned by the husband and wife as community property under state law
no one else would be considered an owner for federal tax purposes, and
the business is not otherwise treated as a corporation under federal law.

In most cases, this would mean that the spouses would file a joint tax return (with the general tax savings that come with such a return), and include with that return a Schedule C, and any other relevant schedules (Schedule SE, Schedule E, and so on), for their business. For all practical (tax) purposes, they would prepare their taxes as though their LLC were an SMLLC. This includes same-sex couples who are legally married under state law.

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Carl

Level 11

answer is correct for the 41 states that are not community property states, but it is not right for community property states like CA.

As you know, being a FL resident I've never had to deal with state taxes. My only "hands on" experience is when I was AD/MIL stationed in HI, and my wife worked a civilian job she had to pay state taxes on.

Now I would expect a SMLLC in CA would file the federal return the same as anywhere else. Even if filing joint, I don't see what difference it makes on the federal return if they file the required 1 SCH C in the name of the owner of the business. Both parties on the joint return are still paying the same in taxes as they would if it was split into two SCH C's.

Now I can't speak for the state return (of any state really) for a community property state.