Spouses Owning an LLC Together in California

Couples who run a business together usually ask whether both of them have to be on the LLC, and whether they have to file a partnership return. California’s community property rules give them better answers than the ones most national articles give. They also create a few traps, especially around separate property, management, and what happens when one spouse dies.

Can a husband and wife own an LLC together in California?

Yes. An LLC can have one member or many, and spouses can be the only two. The more useful questions are whose property the LLC interest is, and how the IRS and the FTB will classify the company.

In California, “all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property,” except as a statute provides otherwise (Fam. Code § 760). An LLC interest bought or built with earnings during marriage is presumptively community property, even if only one spouse’s name is on the paperwork.

Separate property is the exception. It includes property owned before marriage and property acquired by gift or inheritance, along with the rents and profits from it (Fam. Code § 770). A business one spouse started before the wedding can stay that spouse’s separate property, though community effort during the marriage can complicate that. Sorting it out is a characterization question, and it matters for the tax choice below.

How is a married couple’s LLC taxed?

If the couple owns it as community property, they choose. A multi-member LLC is normally a partnership for federal tax purposes, but the IRS carved out an exception for spouses in community property states.

Rev. Proc. 2002-69

Under Revenue Procedure 2002-69, a business entity is a “qualified entity” if it’s wholly owned by a husband and wife as community property under state law, no one other than one or both spouses would be considered an owner for federal tax purposes, and the entity isn’t treated as a corporation. For a qualified entity, the IRS will accept the couple’s treatment of it as a disregarded entity, and will equally accept treatment as a partnership if they file partnership returns. A change in reporting position is treated as a conversion of the entity.

In practice, that means a couple’s California LLC can report its income on a Schedule C with their joint return, instead of filing a federal partnership return and issuing K-1s. Some couples prefer the partnership return anyway, because it separates the business’s books from the household’s and shows each spouse’s share. Either choice is legitimate. Pick one with your CPA and stick with it, because switching is treated as a conversion.

The qualified joint venture election doesn’t apply to an LLC

Many articles confuse Rev. Proc. 2002-69 with the “qualified joint venture” election. They’re different rules. The IRS says the qualified joint venture election covers only businesses owned and operated by spouses as co-owners “and not in the name of a state law entity (including a limited partnership or limited liability company).” A business owned and operated through an LLC doesn’t qualify for that election, and the IRS points couples in community property states to Rev. Proc. 2002-69 instead.

When the Rev. Proc. doesn’t fit

It requires community property. If one spouse’s interest is separate property, like a business owned before marriage that’s now in an LLC with the other spouse, the LLC isn’t “wholly owned by a husband and wife as community property,” and it’s a two-owner partnership for tax. The same is true if anyone other than the spouses owns a piece, including a child or a friend who holds one percent. A written transmutation can change the character of property, but it’s valid only if made in writing by an express declaration joined in or accepted by the spouse whose interest is adversely affected (Fam. Code § 852(a)). My page on transmutation agreements covers what it takes.

Self-employment tax

For a business that isn’t taxed as a partnership, community income is treated as the gross income and deductions of the spouse carrying on the business, or, if the spouses operate it jointly, of each spouse by distributive share (26 U.S.C. § 1402(a)(5)(A)). For a partnership, the partner’s whole distributive share counts in that partner’s own self-employment earnings, and none of it counts for the other spouse (26 U.S.C. § 1402(a)(5)(B)). The choice can change whose Social Security record gets the credit, which is a question worth putting to your CPA before you file the first return.

How does California treat a married couple’s LLC?

California follows the federal classification, with one large exception. The LLC still pays and files as an LLC.

The classification of an eligible entity “as a partnership or an association taxable as a corporation” for California purposes “shall be the same as the classification of the entity for federal tax purposes,” and if the entity is disregarded federally, California disregards it too, “other than” the LLC tax, the LLC fee, and the LLC return (Rev. & Tax. Code § 23038(b)(2)(B)). The FTB’s Form 568 instructions make the same point for single-member LLCs, which must still pay the tax and fee and file a return.

So a couple who elects disregarded treatment still files California Form 568 and still pays the annual tax (Rev. & Tax. Code § 17941). If the LLC’s California total income reaches $250,000, it owes the LLC fee too (Rev. & Tax. Code § 17942). My pages on the $800 LLC tax and the LLC gross receipts fee cover both.

A worked example

A couple in Simi Valley runs a garden design business through an LLC they formed during their marriage and paid for with community funds. The business brings in $210,000 in revenue and nets $120,000.

Item	Treated as disregarded	Treated as a partnership
Federal business return	None; Schedule C with their joint Form 1040	Partnership return and a K-1 for each spouse
California LLC return	Form 568	Form 568
California annual tax	$800	$800
California LLC fee	None, total income under $250,000	None, total income under $250,000
Self-employment tax	Follows the spouse or spouses carrying on the business	Follows each spouse’s distributive share

The disregarded route saves a federal return. It doesn’t save anything in California. If their revenue grows past $250,000 in total income, the fee applies under either choice, and if profit grows enough, an S corporation election may beat both. My single-member LLC vs. S corp guide covers that comparison.

Should both spouses be members of the LLC?

It depends on what you want the paperwork to show, because the community property rules apply either way. If the LLC interest was acquired with community funds during marriage, it’s presumptively community property even if only one spouse is listed as the member (Fam. Code § 760).

Listing both spouses makes the ownership match the property law and keeps the Rev. Proc. 2002-69 choice clean. Listing one spouse can make sense when that spouse runs the business alone, but the other spouse still has a community interest, and California gives the spouse who operates a community business “the primary management and control of the business,” subject to a duty to give the other spouse prior written notice before selling, leasing, or encumbering all or substantially all of the business’s personal property (Fam. Code § 1100(d)). Each spouse also owes the other fiduciary duties in managing community assets, including full disclosure (§ 1100(e)).

For management, a couple can choose member-managed, where both can sign, or manager-managed with one spouse as manager. My guide to member-managed vs. manager-managed LLCs explains the tradeoffs.

What happens to the LLC when one spouse dies?

The answer depends on how the interest is held. At death, one-half of the community property belongs to the surviving spouse and one-half belongs to the decedent (Prob. Code § 100(a)). Community property that passes to the surviving spouse by will or intestacy passes without administration (Prob. Code § 13500), but in practice the survivor often needs a spousal property petition to get banks and others to recognize the transfer.

The cleaner route is to assign both spouses’ LLC interests to their joint living trust. The successor trustee, usually the surviving spouse, then controls the interest the day after death without a petition. The LLC’s operating agreement should allow that transfer and say who manages next. Without that, the statute gives a deceased member’s personal representative only the rights of a transferee and certain information rights for settling the estate (Corp. Code § 17705.04). A transferee receives distributions but doesn’t vote or take part in management (Corp. Code § 17705.02(a)(3)). My guide on what happens to an LLC when the owner dies goes deeper.

The double step-up

Community property carries an income tax benefit at the first death. Federal law treats the surviving spouse’s one-half share of community property as acquired from the decedent, as long as at least half of the community interest was included in the decedent’s gross estate (26 U.S.C. § 1014(b)(6)). The result is that both halves of a community LLC interest can get a new basis at fair market value, not only the decedent’s half. Holding the interest as community property, and documenting it that way, supports that result. My page on the community property step-up explains the math, and your CPA should confirm the basis figures.

What happens to the LLC in a divorce?

A community property LLC interest is divided like other community property. That’s family law, which I don’t handle, and a couple facing divorce needs family law counsel. Before any of that happens, I can draft an operating agreement that says what happens to a spouse’s interest on divorce, such as a buyout right for the spouse who runs the business at a formula price. That’s far easier to agree on while you’re happily married. A buy-sell agreement is the usual vehicle.

What about registered domestic partners?

California law gives registered domestic partners the same rights and responsibilities as spouses (Fam. Code § 297.5(a)), so their earnings during the partnership are community property under state law. Rev. Proc. 2002-69 is written for “a husband and wife.” Whether it reaches registered domestic partners who aren’t married is a federal question, so work through the classification with your CPA before relying on disregarded treatment.

A setup checklist for couples

1. Decide whether the interest is community or separate property, and document any transmutation in writing.
2. Form the LLC with both spouses as members, or decide deliberately to list one.
3. Pick member-managed or manager-managed, and say so in the articles.
4. Choose disregarded or partnership treatment with your CPA, and stay consistent.
5. Sign an operating agreement covering death, incapacity, divorce, and management.
6. Assign both interests to your living trust, and confirm the trust’s schedule lists the LLC. My trust funding page covers the assignment.
7. Calendar the Statement of Information and the annual tax. See the annual requirements page.

Frequently asked questions

Does a husband and wife LLC in California have to file a partnership return?

Not if the spouses own it entirely as community property and choose disregarded treatment. The IRS accepts either disregarded or partnership treatment for an entity wholly owned by spouses as community property (Rev. Proc. 2002-69). The LLC still files California Form 568 and pays the annual tax.

Can a married couple’s LLC be a single-member LLC?

For federal tax, it can be treated like one under Rev. Proc. 2002-69 if the spouses own it as community property. Legally, it still has two members if both are listed. California disregards it for income tax but still collects the LLC tax and fee (Rev. & Tax. Code § 23038(b)(2)(B)(iii)).

Can we use the qualified joint venture election for our LLC?

No. The IRS says the qualified joint venture election doesn’t apply to a business owned through an LLC or other state law entity. Couples in community property states use Rev. Proc. 2002-69 instead.

If only my spouse is listed on the LLC, do I own part of it?

If it was acquired with community funds during the marriage, it’s presumptively community property, so yes (Fam. Code § 760). The spouse who operates the business has primary management and control but must give the other spouse prior written notice before disposing of substantially all of its personal property (Fam. Code § 1100(d)).

What if one of us owned the business before we married?

That interest may be separate property (Fam. Code § 770), and the Rev. Proc. 2002-69 choice may not be available because the LLC isn’t wholly community property. It’s often taxed as a partnership in that case. A written transmutation can change the character, but it has consequences at divorce and death, so think it through first.

Does an LLC owned by spouses get a step-up in basis when one dies?

If it’s community property, both halves can receive a new basis at the first death under 26 U.S.C. § 1014(b)(6). If the interest was the decedent’s separate property, it gets a new basis, but the survivor’s own separate property doesn’t. Your CPA should confirm the figures.