“Tax Returns for Limited Liability Companies Owned By Husband and Wife ” by Frank C. Carnahan
Single member limited liability companies (“LLC”) are treated as a “disregarded entity”, which do not have to file a separate tax return, and the LLC’s income and expenses are included on the sole LLC member’s return. Previously, the consensus was that where the only LLC members were a husband and wife, they were counted as “one” member and the LLC was treated as a “disregarded entity” for tax purposes. Recently, the Internal Revenue Service issued guidance on husband and wife partnerships and their ability to elect out of partnership status, including that the
election is not available if the spouses own the business through an LLC.
While the IRS did not explicitly clarify that husband and wife LLCs must file a form 1065 partnership return, there is a substantial penalty for each required form K-1 for failure to file the return if required, so the safe advice at this time is that husband and wife owned LLCs should file a partnership tax return.
Alternatively, you can transfer 100% of the LLC member interest to one spouse, and can make a pay on death (“POD”) designation so that the surviving spouse automatically inherits the interest, to qualify the LLC as a single member LLC/disregarded entity. We can set the LLC up so that both spouses are managers, which typically requires converting from a member managed to a manager managed LLC by amending the Articles of Organization and Operating Agreement.
I suggest that you contact your accountant or our office with any questions you may have regarding the correct filing status.