Your Sole Proprietorship and Your Spouse

When starting a small business, understanding how a sole proprietorship works with your spouse can be a little confusing. A sole proprietor is the only owner of an unincorporated business. Often, family members, like a spouse, are involved in the operations.

Sole proprietorships can be the easiest and cheapest form of doing business, but things can get complicated if your spouse starts helping out. It’s important to choose the right type of business to register under.

Sole proprietorships, by definition, can only be run by one person. So, if you plan on having your spouse help out, there are some important things to consider. For married couples in business, there are specific rules for filing income tax returns. This is especially true if both spouses actively take part in the business.

Let’s dive deeper into this topic and explore the world of sole proprietorships, business tax, income tax, and more.

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Your Sole Proprietorship, Spouse, and Filing a Joint Return

By definition, a sole proprietorship only has one owner. The Internal Revenue Service (IRS) will not recognize you as a sole proprietorship unless there is only one owner. When a sole proprietor is married and the spouse works in the business, they might wonder how to file their income tax return. 

An owner of a sole proprietorship files a separate Schedule C for their Form 1040 for the business income and expenses.

If both spouses materially participate and co-own the business, this is treated as a partnership by default unless the couple elects to be a “Qualified Joint Venture” with the IRS.

Married couples can choose to file a joint federal income tax return and elect Qualified Joint Venture Status. In this case, they report the business’s income and expenses on a separate Schedule C for each spouse. The Schedule SE is then used to compute Social Security and Medicare taxes. This means each spouse pays these taxes on their share of the business income. Keep in mind, if only one spouse is involved in the business, then only that spouse will complete a Schedule C.

Filing a joint tax return with your spouse that includes the profits of your sole proprietorship will not convert it into a partnership. Although the IRS treats the income as belonging to you and your spouse, it still recognizes that only you own and run the business. On your joint tax return, you would list all your business income on a Schedule C form.

Be careful when filling out your tax return to list only yourself on Schedule C as well as any other business registration forms you file. This will make it clear to the IRS that although the income is joint, the business is run solely by you. Anyone familiar with marriage property rights in community property states may find this odd. However, business assets acquired during a marriage do not automatically grant the non-owner spouse legal rights to the business entity itself.

Your Sole Proprietorship, Spouse, and the Tax Consequences

As a business owner, you will typically owe employment taxes. You will have to withhold a certain part of an employee’s paycheck for tax purposes. If you plan on having your spouse occasionally volunteer for your business, you need to be extremely careful about what you allow them to do. This includes how often they volunteer.

For example, if your spouse does any sort of advertising, contact with the public, or signing of documents, they may be holding themselves out to the public as a co-owner of the business in the eyes of the IRS. If that happens, the IRS will hit you with back taxes and penalties. Any advantage you gained by running a sole proprietorship will be erased and you may face additional consequences.

If you do end up using your spouse to help, even if only sporadically, consider creating an independent contractor agreement. While an independent contractor agreement is a wise step, it will not shield you from the IRS if you treat your spouse as a regular worker or co-owner. However, such an agreement should be sufficient if your spouse’s help is only occasional and in a limited capacity.

Finally, be aware of the consequences to your spouse of treating them as an independent contractor. As an independent contractor, your spouse will have to pay their own self-employment taxes since you will not be doing payroll taxes as if they were an employee.

Another option is to make your spouse an employee of the company for which you would have to pay FICA taxes (Social Security taxes and Medicare).

Your Sole Proprietorship, Spouse, and Equal Ownership

If your spouse wants any kind of say in your business or wants a specific share of your business’ profits, then a sole proprietorship will not work. The moment you break the cardinal rule of a sole proprietorship – that there is only one owner – you have created a different kind of business entity that requires specific documentation and which will be taxed differently for federal tax purposes.

In other words, you cannot simply call a business a sole proprietorship but run it as if it’s a partnership or corporation. If you do, you will be heavily penalized by both the federal and state governments.

If the limitations of a sole proprietorship are proving to be too restrictive, consider switching to another form of business that allows for more flexibility but requires greater documentation and tax returns. Common forms of joint business ownership include partnerships, limited liability companies, and corporations. Each of these has its own special advantages and disadvantages and may require registration according to your state law.

Even if you create a partnership or LLC, you can still maintain an operational structure where one spouse handles the majority of the work. This can reduce any future ambiguity and liability that may come with your spouse’s status in a sole proprietorship but still allow one spouse to primarily run the business.

Have Additional Questions About Your Sole Proprietorship? Talk to an Attorney

Running a business can be quite a workload for one person, so getting help from a spouse is often a good idea. Make sure you understand the legal implications of working with your spouse. It’s a good idea to contact a local business attorney to learn about the effects of involving your spouse in your sole proprietorship. They can help you pick the right business structure, help with any tax deductions you might be owed, and make sure the owner-spouse relationship is covered.