A number of CPAs still resist filing a separate partnership return for husband-and wife-owned LLCs. We recommend doing the separate return, for both IRS reasons and liability-shield reasons under Georgia law. Here’s more detail about why.
First, on the tax side, there are two relevant items.
We start with the pertinent part of Rev. Proc. 2002-69. It states that a husband and wife who own an entity as “community property” under a particular state’s laws can elect to treat it for tax purposes as either a disregarded entity or a partnership.
That’s fine; but Georgia is not a “community property” state.
Reinforcement (albeit informal) comes from an article on the IRS website (updated in December, 2011): “An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes.”
Now that article describes another exception beyond the “community property” one. It says that a husband and wife can elect not to be treated as a partnership for Federal tax purposes if they’re in a “qualified joint venture” owned 100% by the two of them.
But what’s a “qualified joint venture?” The article has some definitions, but here’s the key provision:
“A qualified joint venture . . . includes only businesses that are owned and operated by spouses as co-owners and are not in the name of a state law entity (including a limited partnership or limited liability company).”
There’s also a state law liability reason to file a separate tax return for the husband-and-wife LLC. Picture this: a creditor’s attorney is taking a spouse’s deposition; the spouse is figuring that his (or her) assets are protected because they’re all held inside an LLC. The creditor’s attorney is looking for evidence that the LLC is a sham. So the attorney asks, “Does your LLC file its own tax return?”
The answer ought to be: “Yes, it does, and here’s a copy of the return the LLC files.” The answer should not be: “No, because my accountant says the IRS allows LLCs to be included on our personal return.”
It’s the same reason LLCs should have Operating Agreements and minutes of meetings. But that’s topic for another day.
And that’s why we recommend to husbands and wives who own LLCs to file that separate return.
We hope this information is helpful. And if you have any questions/thoughts, we’d be delighted to hear from you.
George and Claire