Family Businesses as Sole Proprietorships

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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Thanks to a new law in 2007, the spouse of a sole proprietor will get credit toward Social Security taxes paid at the same level as the sole proprietor. Previously, the spouse had to file his or her own Schedule C or draw a paycheck to get credit, and this often meant many spouses weren't accumulating credits toward Social Security. Now, both spouses will get equal credit from a joint tax return.

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Family Businesses as Sole Proprietorships

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