Single Member LLC vs Multi Member LLC to add spouse

[GG-88]

Hello, I have a single member LLC in bookkeeping field and I wanted to know if I  need to change my LLC to multi member to add my spouse if he also helps and works for my LLC for free?  We are both in the same field.  We file as married joint returned with the single member LLC disregarded entity.  Does it change anything with the filing?  And if I do need to add him to my LLC, how would I do that?  Do I just update the CA SOS filing and add his name?  Is there anything thing else I need to do? What are the pro and con for adding him and changing to multi member llc?  Since we are a married couple, would the tax filing for the LLC be treated the same as disregarded entity?  

[MaryK4]

If there is a qualified entity owned by spouses as community property owners, and they treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.  You can add him to your LLC filing with the secretary of state.  The biggest pro is that you can both participate in the business as Schedule C filers so you can both choose to have self-employment income.  Because you would be required to file separate Schedule Cs to report each spouse's income and deductions, this additional paperwork could be considered a con (but you have plenty of freedom to divide the income).  If you elect to file the disregarded entity, there would be no difference in how you file (other than having to prepare a Schedule C for each of you).

[GG-88]

What the best approach between paying my spouse who help out part time (20%) via 1099 or adding my spouse to my LLC and filing two schedule C.  Which approach would work best?  

Pro and cons?

[GeorgeM777]

Either way, paying via a 1099-MISC or having your spouse include their respective income/expenses on a Schedule C, the result would probably be the same.  To follow-up on the comments from @MaryK1101, you would have more paperwork to handle if you issued your spouse a 1099-MISC.  We assume your spouse would take the position that they are self-employed and that the work performed was done in connection with the spouse's trade or business.  If your spouse were to take the position that they were not self-employed, and that their bookkeeping was not consistent enough to be a trade or business, then whether you spouse received a 1099-MISC or not, they would still report their income on their return but would not complete a Schedule C.  Moreover, the spouse would pay income tax on their income but not self-employment tax.  

If you decide to treat your spouse as an employee, you will have more work to do, such as, among other things, withholding and remitting the applicable taxes.  Thus, you probably want to avoid the employer/employee relationship.  Here is some information about qualified joint ventures which applies to married persons in business together.

Under the IRC, a qualified joint venture conducted by a married couple who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses following in accordance with their respective interests in the venture. Each spouse considers his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of figuring out net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes under the provision (for example, in accordance with their respective interests in the venture).

More information about married couples in business can be found here:

Married Couples in Business

@GG-88