There are many advantages and few drawbacks in operating your business with family members. There are certain tax breaks for husband-wife businesses. You can work with your spouse and still be considered a sole proprietor. This eliminates tax requirements that would occur if your spouse was considered an employee. At the same time, the decision making responsibilities should be very clear among both spouses. This is a common problem among husband-wife partnership.
How it Works
Similar to that of any new business, both members of a husband-wife partnership must register their business. A husband-wife partnership requires in-depth discussions about the role of each person in the organization, expectations from each other, careful financial planning, and crosschecking with both the federal and state tax authorities regarding proper procedure. It is also essential to visit a lawyer to draw up a partnership agreement.
Once the agreement is made, it will be stipulated that each person is 50 percent responsible for all the profits and loss. Also, it is important for a husband-wife partnership to consider and agree on terms in event the marriage ends in divorce.
The major benefit from a husband-wife partnership business is the tax benefit. If you form a business partnership with a third business person, you lose the ability to file business income and expenses on your personal tax return. Form 1065, Schedule K-1, and other tax forms are required from each partner. However, if your business partner is your spouse, you get the freedom to handle the taxes just as if you owned a sole proprietorship.
Filing taxes on your personal income tax forms not only simplifies the process of tax procedures but also offers significant tax benefits. This eliminates each person from paying separate self-employment tax (15% of the first $97,000, or so) and it's combined. The tax burden is slashed immediately if you make more than that amount annually.
Also, since husband and wife partnership is a shared relationship, each one is responsible for business operations and expenses. Defaulting on one is unfair because all assets are joint assets. Two general partners are each responsible for only half the business debt, while a married couple as owners find themselves jointly responsible for all of it. This ensures that each partner works equally hard at making the business succeed.
The costs of setting up a husband-wife partnership are very similar to setting up another type of partnership with an unknown business partner. The nominal cost that a county charges for registering a business, along with associated cost in filing a DBA, for both you and your spouse are roughly $500-$1,500. Additional cost might be required to incase of separating the shares of the business.
Once you have decided to bring in your spouse to be a partner in your business, it is essential that you draw a husband-wife partnership agreement immediately. You can initiate a husband and wife partnership at any time.