Can mixing Business and Marriage Really Work? By Austin Estate Planning Attorney Zachary D Kamykowski

Considerations Before Owning A Business With Your Spouse

Running a successful business and having a successful marriage requires commitment and hard work. Many married couples find operating a business together challenging. But mutual devotion as spouses and business partners can bring higher levels of accountability and trust to the business. If you and your spouse can find ways to balance your work and personal lives, owning a business together can make your relationship even more rewarding.

Before embarking on a new business venture, you and your spouse should understand what each of you brings to the venture, how to divide responsibilities, and what type of business entity you will form. The potential for blurred lines in a couple-owned business makes it crucial that they treat the business relationship professionally from the start. Have formal written agreements to ensure mechanisms exist to deal fairly and legally with any problems that may arise.

As an Austin life and legacy attorney, I advise families on how to protect, grow, and transfer their assets on their own terms. From a governance perspective, it is much easier to build a family business correctly than try and instill professionalism after years of ad-hoc agreements.

Choice of Entity for couples mixing business and marriage

Family-owned businesses are typical in the United States. One should not always take the term "mom-and-pop" business literally. Nonetheless, married couples run approximately 1.5 million businesses nationwide.

This is an excellent first step for evaluating the type of business structure that you should have. For the couple who shares everything—including a business—you probably have a good idea of how your skill sets overlap and complement each other. If you plan on both being owners and taking part in the day-to-day business management, a partnership, limited liability company (LLC), or corporation might make sense. One or both spouses can be managers of the business if they have an active role in its day-to-day functions.

Business Entity Tax Implications

The type of business entity you choose has significant tax implications. You should discuss specific questions about ownership structure and taxation with an attorney, but in general, the following rules apply:

• Sole proprietorships, partnerships, LLCs, and S corporations are pass-through businesses. This means that they are not subject to corporate income tax. Instead, profits from the company "pass-through" to owners and the IRS taxes them at the individual level. If you and your spouse jointly own a pass-through business, you will each report your share of the business's income on your personal tax return (e.g., 50 percent each if you co-own the business equally) and pay the appropriate amount of income tax. In addition, you will pay self-employment taxes on business income (i.e., Social Security and Medicare taxes).

• If one spouse owns the business and the other spouse is an employee of the company, the owner pays income tax and self-employment tax, and the spouse who is an employee pays income taxes according to their salary. In addition, the owner spouse pays the employer portion of the employee spouse's Social Security and Medicare taxes. Another distinction is that employers automatically withhold employee income taxes from paychecks. In contrast, self-employed business owners must pay quarterly state and federal estimated income taxes. Failure to pay estimated taxes can result in penalties.

• The IRS treats a business co-owned by a married couple as a partnership for federal tax purposes unless they have elected that the IRS tax them as an S or C corporation. However, under Internal Revenue Service (IRS) rules, a married couple conducting a qualified joint venture can file their business taxes on separate Schedule C forms.

• In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), special IRS rules apply. Specifically, an LLC jointly owned by a married couple could operate as a disregarded entity for federal tax purposes. In other words, they do not have to treat their business as a partnership. Instead, for tax purposes, the IRS will treat the business as a single-member LLC that is not separate from its owners.

mixing business and marriage requires Contracts

When starting a business with a spouse, it may be tempting to rely on the trust you have built in your marriage to weather any storms. But if the marriage struggles or falls apart, this will inevitably affect the business. And even during good times, it is best to have everything in writing.

Depending on the type of business you form, make sure you have an agreement. This could be a partnership agreement or an LLC operating agreement. It should spell out the management structure and the process for dissolving or leaving the company. This agreement will also have indemnification terms, ownership percentages, and the process for adding new members.

buy-sell agreement

You might also consider a separate buy-sell agreement. This agreement will detail how to deal with the sale or buyout of a spouse's ownership interest. This could come into play during a divorce. But it is also crucial in the event of the untimely passing of a spouse. Finally, you would turn to this agreement if one of you simply wants to get out of the business.

Employment contracts

Suppose you are not co-owners, and one of you is an employee. In that case, you will need a contract. It will stipulate job duties, pay, and benefits. The contract will also determine how and when the employment relationship can terminate. It can also spell out the dispute resolution process, and other employment terms.

Treating your spouse as a business partner may be initially uncomfortable, complete with contractual obligations. But clear written rules for the business signal that you are both taking the business seriously. Your marriage is a contract, after all. Contracts are just a way to ensure that the parties are on the same page and equally committed.

Consider working with an attorney to keep your business above board and professional. Mixing business and marriage is challenging. A good advisor can help, however. They can advise you on business entity structure, taxation issues, and contracts. A neutral and knowledgeable business attorney can provide a third-party perspective. This can prepare you and your spouse for long-term business success. Please call or contact our office to set up an appointment.