Family Businesses as Sole Proprietorships

Although the sole proprietorship is, by definition, a single-owner business, many family businesses are operated in this form even though both spouses consider themselves to be the owners.

If one spouse is the primary business operator, he or she can file as a sole proprietor even if the other spouse fills in as needed or consults on major decisions. If both spouses actively work in the business, you may consider one spouse to be the owner for IRS purposes, and the other may be considered an employee (or possibly even an independent contractor) which will save you the time and trouble of filing partnership tax forms.

Qualified joint venture. If you and your spouse each are active in the business and you file a joint return, you can elect to have the business treated as a qualified joint venture rather than as a partnership for tax purposes. The husband and wife can be the only members of the joint venture. If there are other individuals in the enterprise, the provision does not apply. Additionally, both spouses must materially participate in the business.

If the election is made, each spouse takes into account his or her share of income, gain, loss, and other items as a sole proprietor. Instead of filing Form 1065 (and issuing yourselves Schedule K-1s reporting your shares of the income and expenses) you each file a Schedule C (or Schedule C-EZ) and report the income and deductions directly on your joint return. This election will continue to be in effect unless you receive the IRS's permission to change it or you no longer meet the conditions for making the election.

You should be aware that under many state marital property laws, both spouses may be considered to be owners of the business assets in case of divorce, regardless of whose name is listed as the owner on the tax forms or the property records.

Work Smart If both spouses work in the business and you want both to obtain wage credits toward Social Security disability and retirement benefits, you'll generally need to have paychecks issued, and payroll taxes withheld, for the spouse who is not listed as the sole proprietor.