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CA-business
Returning Member

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


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?

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Accepted Solutions
jtax
Level 9
Intuit Approved!

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

Be careful. @Carl 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 15

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

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.

 

CA-business
Returning Member

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

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?

 

jtax
Level 9
Intuit Approved!

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

Be careful. @Carl 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 15

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

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.

 

tagteam
Level 15

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

In terms of income tax, itself, filing one or two Schedules C makes virtually no difference with respect to a joint federal income tax return.

 

However, filing a second Schedule C is useful in allocating self-employment tax to the other spouse.

jtax
Level 9

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

@Carl this isn't an issue with state taxes. Your statement was that a single member LLC had to have a single member for federal tax purposes. That is not true in community property states. CA is a community property state. 

 

I just wanted to be sure the OP knew his or options. Particular because the question was on that point.

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CA-business
Returning Member

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

Thanks for all the insights and replies.  

 

If I'm understanding this right, in a community property state like CA, any income generated is equally divided between husband and wife and they have to report their share and pay all taxes including self employment taxes. I guess, my plan to save on self employment taxes on my wife's share is not possible with just LLC.

 

Do you think leaving the business as S Corp would be the best? I can draw salary just for myself as wife is not involved and rest we can take as distribution. 

 

 

tagteam
Level 15

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


@CA-business wrote:

Do you think leaving the business as S Corp would be the best? I can draw salary just for myself as wife is not involved and rest we can take as distribution. 


Not that it matters much, but that is what I would do, personally. If the enterprise is never going to expand past you and your wife, then leaving it as an S corporation provides you with a lot of flexibility.

 

The downside is, of course, the fact that you have to file an 1120-S.

CA-business
Returning Member

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

Looks like married owners in the community property states don't have to split the business income equally. Found this on the IRS's website - https://www.irs.gov/instructions/i1040sc

 

Community Income

If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat your wholly owned, unincorporated business as a sole proprietorship, instead of a partnership. Any change in your reporting position will be treated as a conversion of the entity.

Report your income and deductions as follows.

  • If only one spouse participates in the business, all of the income from that business is the self-employment earnings of the spouse who carried on the business.

  • If both spouses participate, the income and deductions are allocated to the spouses based on their distributive shares.

  • If either or both spouses are partners in a partnership, see Pub. 541.

  • If both spouses elected to treat the business as a qualifying joint venture, see Qualified Joint Venture, earlier.

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