Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?

Question: Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?

Answer:

Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.

A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture:

The only members in the joint venture are a husband and wife who file a joint tax return,

The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),

The husband and wife must each materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and

Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return, by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship), Schedule F (Form 1040), Profit of Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax, to pay self-employment tax.

For more information about the qualified joint venture rules, see Election for Husband and Wife Unincorporated Businesses.

Husband and wife businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For Special Rules for Spouses in Community States, see Revenue Procedure 2002-69 and the Instructions for Schedule C.