Family Businesses as Sole Proprietorships

April 13, 2006

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Although the sole proprietorship is, by definition, a single-owner business, many family businesses are operated in this form even though both spouses consider themselves to be the owners.

If one spouse is the primary business operator, he or she can file as a sole proprietor even if the other spouse fills in as needed or consults on major decisions. If both spouses actively work in the business, you may consider one spouse to be the owner for IRS purposes, and the other may be considered an employee (or possibly even an independent contractor) which will save you the time and trouble of filing partnership tax forms.

You should be aware that under many state marital property laws, both spouses may be considered to be owners of the business assets in case of divorce, regardless of whose name is listed as the owner on the tax forms or the property records.

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If both spouses work in the business and you want both to obtain wage credits toward social security disability and retirement benefits, you'll generally need to have paychecks issued, and payroll taxes withheld, for the spouse who is not listed as the sole proprietor.