The IRS says that to be a husband and wife owners of an LLC to be considered a disregarded entity, they have to satisfy the following:
- The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
- No person other than one or both spouses would be considered an owner for federal tax purposes; and
- The business entity is not treated as a corporation under IRC §310.7701-2.
(See https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-compan...)
If the conditions above are satisfied, the husband and wife can choose to be treated as a disregarded entity (in which case, they file two Schedule Cs, allocating income and expenses to each according to their contribution of work) or as a partnership (in which case they do NOT file Schedule Cs but file a 1065 and report K-1s on their 1040 return). Among other things, the use of two Schedule Cs means that there are two Schedule SEs (one under each SS number), so each taxpayer is credited with their proper amount of self-employment tax paid (for when they start drawing Social Security).
It's a binary decision: either you are a disregarded entity or you are a partnership. (of course, the LLC could choose to be treated as a corporation for federal purposes, but that's not being discussed here)
