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February 10, 2019

Can an LLC Owned by Husband & Wife Change Tax Filing Status?

We have owned our business since 2004 and are an LLC owned by husband and wife. I am the majority owner (75%) and my wife has 25% ownership. We currently file with one joint personal return and one for the LLC taxed as a partnership. We have not filed for this year but want to change our filing status to be a disregarded entity. Can I elect a disregarded entity and file only one return? The LLC was formed in Delaware and we are residents of Delaware and the business is located in Massachusetts. If so, is there anything special I need to do given that we filed separate business and personal returns previously?


Use IRS form 8832, Entity Classification Election, to elect to have your LLC taxed as a disregarded entity (the only limited liability companies eligible for such treatment are single-member LLCs and LLCs where the only two members are husband and wife):


An LLC with at least two members will be classified as a partnership by default unless Form 8832 is filed with the IRS and elects to be treated as a corporation. Also, a single-member LLC is automatically a disregarded business entity taxed as a sole proprietorship unless Form 8832 is filed and the corporation status is elected.

Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.

In your situation, it’s too late to elect disregarded entity status for last year’s return. However, you can file your Form 8832 to elect disregarded entity status going forward. Attach a copy of your Form 8832 to your partnership tax return when you file it.

Is there any reason to continue to do the separate returns? Is there any other reason to do it besides the obvious administrative benefits?


If you are a married couple and file joint personal tax returns, I can’t think of any reason why your tax situation would change going from partnership taxation (where you and your spouse are the only members of the LLC) to disregarded entity status.

So yes, the advantage of the disregarded entity status is the administrative benefits.

The only advantage to keeping it separate, and this is an “advanced” topic, is that as a disregarded entity, your income and expense statements are on your Schedule C, as opposed to a separate form 1065. Now, there are tax advisors who speculate that you are less likely to be audited if you file as a partnership using form 1065 rather than as a disregarded entity using

Schedule C. The statistics do somewhat support that view.

One thing to keep in mind is whether the LLC is in a community property state. LLCs owned by a husband and wife in (AZ, CA, ID, LA, NV, NM, TX, WA, & WI) can treat their LLC as a disregarded entity for federal income tax purposes if: the LLC is wholly owned by the husband and wife as community property under state law and not taxed as a corporation. This often means that each spouse would file a joint tax return with a Schedule C.

That said, even the “increased” chance of audit using a Schedule C is about 2% (meaning, you have a 2% chance of being audited in any particular year).
With proper records and receipts, an audit should be nothing to fear. Furthermore, many audits are conducted through the mail and do not involve an IRS agent physically rummaging through your desk drawers and files.

The administrative benefits of disregarded entity status accrue each year, while the chance of an audit is slim (you have a 98% chance each year of NOT being audited).

The choice is ultimately yours but you may want to engage a CPA to fully discuss the options.

Return to Ask A Question About Single Member LLCs.

Can a Single Member LLC be owned by Husband and Wife in A Community Property State?

For tax purposes, can an LLC whose only members are husband and wife be treated as a single member LLC in a community property state (CA)?


For income tax purposes, an LLC owned solely by husband and wife can be treated as a single member limited liability company. This includes the election as a disregarded entity.

Whether the limited liability company is formed in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, & WI) is not relevant for this purpose–LLCs in all states can elect single member LLC status if owned by a husband and wife who file their income taxes jointly.

Of course, being in a community property state will obviously have an impact on the distribution of the LLC membership interests in the event of a dissolution of the marriage.

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March 28, 2018

How Do I Remove My Name From A DBA Partnership I Have With Another Person?

I obtained a DBA with my brother in law to form a drywall business. I found out that he was doing some things that weren’t right by me (keeping funds for his own use vs paying the material bill with the funds).

I want to be rid of him. He is forming a bad name for me with less than perfect work, not to mention the embezzlement! How do I remove my name from a business partnership / DBA and get my own? I would like to become an LLC.


Do you two have a written partnership agreement, or are you simply doing business together?

Assuming you have a written partnership agreement, you can follow the procedures therein.

Otherwise, as “de-facto” business partners, you’re going to have to determine what your state’s requirement is for revoking a DBA. Some states have no dissolution requirements. You will want to notify the IRS and close the EIN account. There may also be a state registration that should be closed as well.

Remember that a DBA is just a way of officially “renaming” an already existing business entity. For sole proprietors, the DBA is “renaming” themselves. John Smith becomes XZY Dry Cleaning.
Moreover, a DBA can also be used as an official alternative name for an entity like a general partnership or corporation. For example, Jack & Jill partnership can be DBA’d to a business name like Superior Water Fetching.

You should examine the DBA filing and figure out if the filing was under your name, your brother’s name, or both names as a partnership. DBAs are typically filed with the county clerk and occasionally with the Secretary of State where the business is filed.

You’ll also want to remove your name from any bank accounts for the business and remove your business partner from access to any of your bank accounts.

You’ll also need to inform, in writing, all of the vendors you use that you will no longer transact business as a part of the partnership and that you are not liable for any orders your former partner places in “your name”.

The legal concept is called “apparent authority”. If you and your partner have held yourself out to the public as being a partnership, then if your partner orders supplies, you are going to be liable.

The only way to protect yourself is to send a letter (keep a copy for yourself) to each supplier and tell them that you have dissolved the partnership and that your former partner cannot place any orders in your name, and that he has no authority to act on your behalf and that you have withdrawn from the partnership.

That letter would destroy any expectation in a supplier’s mind that you are agreeing to be liable for these orders.

General partnerships are dangerous because if a partner goes “rogue” and starts buying things in the partnership’s name, and then doesn’t pay the suppliers, the other partner is personally liable.
If you have a big line of credit, this could be tens of thousands of dollars.

Unlike someone slipping and falling at your store, there is no insurance you can buy against a partner’s illegal activities, and this happens more often than you think.

There have been many lawsuits between and among partners–both when times are good (each wants a bigger share of the pie) and when times are bad (each points the finger at the other as the cause of the problems).

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March 27, 2018

What Is The Difference Between An LLC Membership Agreement versus Operating Agreement

Is there a difference between an LLC Membership Agreement and an LLC Operating Agreement? Thank you. Based on some quick research, they seem to be the same thing.


They are the same thing.

While many states do not require a Limited Liability Company to have an Operating Agreement, it is nonetheless a good idea to have one drafted.

Regardless of whether the state you form your LLC in requires an Operating Agreement, if your LLC consists of multiple members, it is imperative that your LLC has a written Operating Agreement.  A single-member LLC is not typically as important, but not a bad idea to draft one.

RocketLawyer has a free Operating Agreement that you can fill in with your information.  Start on it here.

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March 27, 2018

Do You Need To Include “LLC” In Your Logo And Advertisements?

Do you need to include “LLC” in your logo and advertisements as long as it is included in the legal name of the company?


No. The letters “LLC” or Limited Liability Company are not required to be in your logo or even on your business cards.  Is it a good idea to include it?  Yes, usually. Having the LLC show up on the marketing materials make your business look more credible.

The issue is that most people don’t like the look of LLC or Limited Liability Company on their marketing materials.  Some attorneys will strongly encourage a company to use the LLC designation on all materials.  If that is the case and you want to be safe, you can choose to register a DBA (doing business as) which is sometimes known as a fictitious business name or assumed name.  Sole proprietors or partnerships are commonly required to register a DBA if their business name is different from their full first and last name.  Then you have officially registered the use of the company name without the LLC.  Usually, the cost to do this is under $100 and typically a one-time fee.

Even if you aren’t required to use it, I would ensure that all your legal documents–meaning contracts, leases, purchase orders, etc.–use your full LLC’s legal name and that you sign any documents in your capacity as a member of the LLC and not personally.

In other words, you should sign as “Jenny Smith, Member XYZ, LLC.” and not merely as “Jenny Smith”.

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March 25, 2018

Can I Start A Second LLC From The Same Home Office I Am Running The First LLC From?

I already have an LLC that I am running from a home-based office, with myself listed as the registered agent at the same address. Can I start a second business as an LLC and run it from the same address and home office and list myself as the registered agent at my home address for the second LLC, in the same way, I did the first? Would this pose any problems?


Yes you can:

  1. Have the same person as the registered agent for many LLCs (and corporations, too).
  2. Have many LLCs (or businesses for that matter) can share the same registered office.

One caveat is that if you want to keep liability separate for these multiple LLCs, be sure that you treat them as separate entities. That means that they each have their own bank accounts (obviously), if one entity owns a piece of equipment, the other entity doesn’t use it without paying a rental charge, don’t mix money between the two (don’t deposit a check made out to LLC A into LLC B’s bank account, for example).

It is not uncommon at all for many different companies to all use the same address as their registered agent address.

One notorious example is 1209 North Orange Street in Delaware. According to a New York Times article, there are more than 285,000 (yes, more than one quarter million!) companies “headquartered” at the nondescript, one story office building.

  285,000+ corporations and LLCs are headquartered at this single location in Delaware.

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March 21, 2018

Is There A Danger Of Using My Home Address As The Registered Agent?

When forming an LLC my home address was used as there was no office space as yet to list. Will this compromise the LLC and enable anyone to claim against the home address in case of loss?


The short answer is no.

You can use your home address for an LLC as the use of a home address alone as your registered agent address will not cause your corporate veil to be pierced.

Piercing the corporate veil is an extreme remedy, and it usually takes multiple factors–including fraud by the owners/officers of the entity–to cause a court to pierce the veil.

The biggest disadvantage to listing your home address is that you will now get a ton of junk mail to your home because your LLC filing is public knowledge and marketers can purchase a list of newly formed companies.

Every state has a website where any person can search the name of a corporation or limited liability company and see, at a minimum, the registered agent address. Some states further require annual filings listing the officers of a corporation or LLC, and that information is also public.

But at A minimum, your registered agent address is always publicly visible. Furthermore, most states let anyone view the change history to an LLC’s registered or resident agent. If you want to keep your connection to an LLC private for some reason, then you should use an outside provider as your registered agent and not your home address.

Also, if your company is ever sued, the summons will be served at your home, which might cause embarrassment.

For example, I had a client who was sued in federal court by an out-of-state bank on a defaulted business loan, and the bank decided to have the US Marshall serve the summons instead of using a private process server. The client was obviously upset, scared and embarrassed as her neighbors saw federal agents in marked vehicles outside her home and in this world, people are likely to think she did something criminal rather than a mere lawsuit on a business loan.

While many businesses are operated out of the home and there isn’t a separate business address, it may make sense to use a registered agent service. These services provide a business mailing address. In some states, you can use a mailbox service, but a PO Box address is never allowed. Many states though require a physical address and/or registered office where there is a person who can sign for documents if they get served to the business. Be sure to check your states LLC rules and regulations.

If you initially started with your home address, you can always change your registered agent to one of the many registered agent services available in every state. They usually charge anywhere from $75-$200 per year, depending on the level of services provided and who you choose to use.

Some LLC formation services like IncFile offer a free registered agent trail when you sign register your LLC through them.

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March 19, 2018

How Do We Pay Out Distributions To Members?

In an operating agreement for an LLC do you have to spell out exactly how and when the distributions to members are paid out or do you have to pay out your profits as they are incurred?

Example: Can I state in my operating agreement that I will pay out a certain dollar amount per month, starting on a particular date (i.e. beginning in year 3) until the member’s entire investment has been repaid plus an additional dollar amount (say double what they have paid in) and then can I make a particular date and a particular dollar amount to buy them out?

This way I know my exact cash flow to investors.

I understand that they will pay taxes on the profits of the business, but is that regardless of how much I actually distribute to them (I do know that they won’t pay taxes on return of contribution or basis) or do I need to pay them consistent with the profits of the company in addition to their return of contribution?

Thanks for this forum, these are burning questions.

– Lori, Colorado


You can (and should) definitely spell out in exacting detail in your Operating Agreement how the LLC members will be paid.

Also, a Limited Liability Company that is taxed as a partnership is permitted to distribute cash ‘unevenly’ (an amount disproportionate to the member’s ownership interest).

Remember that a member of a pass-through entity does not pay taxes based on money distributed to them, but on their proportionate share (known as pro-rata share) of the LLC’s profits or losses. An LLC is permitted to distribute losses differently among the members –e.g. a member with a 1% interest can take 90% of the tax losses in a particular year.

This can be spelled out in your LLC operating agreement.

Similar to a single-member LLC, a multi-member LLC that is taxed as a partnership or S corporation, does not pay taxes on net income.  Instead of the entity paying taxes, the pass-through taxation is reported on each member’s IRS K-1 form. The amount on the K-1 can be the same or different from the amount distributed.

You can distribute money to investors even if you don’t have profits (or, conversely, you can distribute less than the full amount of profits). These payments can be characterized as interest on a loan, or as guaranteed payments.

Once you get multiple classes of members, with different allocations of profits and distributions, you really ought to get the advice of an attorney or accountant. These are not the type of operating agreements to draft on a napkin after reading something on the internet.

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March 19, 2018

Transferring Single Member LLC To Another Person

My business is a single-member LLC – 100% ownership is mine. I would like to transfer complete ownership to someone else (relative). Can I just make a transfer document and do it or do I have to redraft the operating agreement?

What other requirements are there for transferring ownership of an LLC?


To transfer ownership of the entire LLC, there are a few things you need to do:

  1. Assign your interest in the Limited Liability Company to the buyer. This involves the transfer of ownership through the membership interests of the LLC. At a minimum, draft a resolution of the members of the LLC approving the sale of the interest.
  2. If you have one, amend the Operating Agreement to add the buyer as a member and remove the seller as a member. Many states, such as Arizona, don’t require a written Operating Agreement, especially for single-member LLCs.
  3. Each state has a process for updating the members of record. Some will have a form to file upon the date of the change of ownership, while other states update the names of the members on the annual report.
  4. A buy-sell agreement will be needed that outlines transaction, along with a list and price of the assets that are being transferred, the sales price of the business and any other relevant details regarding the sale of the business. This information is needed for the IRS as there are tax implications for both the buyer and seller.
  5. Last, with the change in ownership, a new EIN will be needed for the new owner.

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March 18, 2018

Managing Member vs Member

In a LLC structure, is there a difference between being called or titled a Managing Member vs being titled or called Member?

– Spencer, New York


All Managing Members are Members, but not all Members are Managing Members.

Managing Members are those specifically able to bind the Limited Liability Company contractually. In the legal world, they have “actual authority” to contract on the LLC’s behalf.

Members may or may not be able to bind the LLC contractually, and doctrines like “apparent authority” and “actual authority” come into play. If the member is authorized as an agent to execute contracts on behalf of the LLC, the member is said to have actual authority. However, a member who does not have actual authority can nonetheless bind the LLC if that member has apparent authority.

The Managing Members should be the people who are transacting the business of the LLC and should be thought of like the executives of the LLC as they are actively involved with day-to-day operations. Not all LLCs will have a Managing Member.

Another aspect of being a Managing Member vs a Member is the extent of fiduciary duties. Depending on how the operating agreement is written, a Managing Member may have more responsibilities (and possibly liability) than just being a Member. This can vary by state too, so be sure to verify.

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March 14, 2018

Does an LLC Protect a Business in a Divorce?

If I have been working a business by myself, can I form an LLC and have my business protected in case of a divorce?


Are you already married?

If you’re already married, there isn’t a whole lot you can do to protect your assets in case of a future divorce regardless of whichever legal entity you choose.

If you aren’t already married, the laws for divorce and LLC ownership differ by state. It’s a really good idea to get professional guidance, but generally, you are able to keep what is termed “separate property” in a divorce. Separate property is money obtained prior to the marriage, or by gift or inheritance. Typically, the property that was owned before you were married is non-marital property and can be kept separate when you divorce. Forming an LLC or corporation is necessary going to keep the business assets separate from the individual, so if your business is a sole proprietorship or partnership (which is a little more complex), you would want to consider forming before getting married.

The trick with separate property is that if you commingle it with marital or community property, it can become marital property. If this happens, the LLC or corporation is likely going to become included as joint marital assets.

So, if you get a big inheritance after your marriage, and deposit it in a joint checking account with your spouse, and both you and your spouse are putting money in and taking money out of that account, your inheritance is likely to become marital property.

The same goes for your interest in your Limited Liability Company – it’s no different than if you buy stock during your marriage. It’s likely to become marital property.

Now, some people form companies and LLCs to fraudulently conceal assets in a divorce for asset protection, but that is a whole separate issue and will cost someone a lot more than if they were just to split assets.

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