Mom and Pop Conundrum
February 20, 2011 8:28 PM   Subscribe

A husband-wife freelancing team has decided to become "official" in the eyes of Uncle Sam. It's just that the poor old guy doesn't make sense some times. Any mefites out there familiar with starting a business with their significant other?

First, the legal prerequisites: You are not my lawyer. You are not my attorney. You are not my insurance consultant.

But maybe, dear hive mind, you can be of some much needed help. Here's the scoop: My wife and I have been making our living writing freelance for several months now. It's been an exciting process, and we've managed to acquire and maintain some great clients. We've actually gotten to the point where we're self-sustaining.

It really happened fast, though. And suffice it to say, we didn't really think about things like, oh, let's see, legal entity structures. Here's the thing—we're good about contractual obligations. Invoices, proposals, deadlines, setting aside money for taxes ... we've handled our finances and clients thus far with all of the necessary administrative minutiae. But we'd really like to step up our professional image and become legally recognized proprietees. We want to be legit, so to speak. We just don't even know what it means to be legit.

In the meantime, we're still offering our services and operating under this vague, federally unrecognized entity. We have a website, a portfolio, business cards, and all the other trappings of any proper freelance writer. Another thing to note is that we'd like to do business as a boutique under a name other than our own (i.e. "Bla and Bla Creative").

We've had problems, though, when asking authorities about the subject. After meeting with the Chicago-chapter SCORE, we were told, simply: "You have to get a lawyer. We are not authorized to consult with you further. Here, take some pamphlets." And the IRS website, while loaded with information, seems to be written for CPAs. The legalese is impenetrable.

Here's what we are aware of: Some entities allow for what's called a "qualified joint venture". This "QJV" is a method for unincorporated husband/wife business teams to "elect not to be treated as a partnership for Federal tax purposes." As to what type of entities, the IRS only makes it clear that LLC's aren't qualified. That, I suppose, is the limit of our knowledge. Surprisingly, google and the usual Internet search methods have been of limited use. Meanwhile, we still have to make hay while the sun shines, and are concerned about the legality of doing so.

Anybody familiar with the process for starting a business with your spouse? It doesn't really matter the nature of the business, either. I suppose that spousal business regulations apply to writers and cobblers and truck teams alike. While recognizing that state laws and individual circumstances may differ, we're simply interested in how other couples may have done it.
posted by shiggins to Law & Government (11 answers total) 1 user marked this as a favorite
Usually in your situation you would establish an LLC of which you and your wife are the shareholders. You should be able to do this yourself or find a lawyer who can set up this paperwork for you.

But there is no such thing as a federally recognized company. Companies are incorporated according to state, not federal, law.

The IRS, though, which is a part of the federal government, supplies all people (corporations are people) with tax ID numbers.
posted by dfriedman at 8:33 PM on February 20, 2011 [1 favorite]

This is, in fact, something you should be seeing a lawyer about. Ask around in your small business community for a lawyer good at helping small businesses deal with these kinds of things. Since you're comfortable handling most administrative things yourselves, you shouldn't need to pay for more than a few hours of a lawyer's time to discuss the various structures available to you and to see what you need to do to get set up with the appropriate licenses and tax agencies.

The goal of "being legit" here is having a separate professional persona to distance your business from your personal lives and finances. That aim is completely shot if you try to do it yourself and screw it up. Part of being legit is hiring professionals to help you with important tasks that require professional advice, and it's hard to imagine what qualifies more than the formation of the legal entity for your business.
posted by zachlipton at 8:38 PM on February 20, 2011

You don't even need a lawyer per se, our tax preparer did the whole spiel for us.
posted by edgeways at 8:50 PM on February 20, 2011

If you already have an accountant -- and I highly suggest you do -- talk to the accountant first, not a lawyer. Your accountant will also be in the best position to advise you about different kinds of business structures and especially their tax implications for you. In my (limited) experience, a lot of the pro/con breakdown for how to structure your business comes down to what it means for your taxes.

If a lawyer is needed to file, your accountant will likely be in a good position to recommend one.
posted by Andrhia at 8:50 PM on February 20, 2011

Talk to your accountant / CPA about which structure makes the most sense for you.

With that in hand, you can create a company yourself (file with the state where you want to incorporate) or you can have someone do the paperwork for you. In California, I used Pacific Corporate Filings and they charged $300 to do all the paperwork.

The paperwork is not particularly hard to do right, if you're reasonably detail-oriented. And as I mentioned above, there are companies that will help you file. The hard part is deciding on the right corporate structure and then doing things by the books once set up.

(I say the above as a fairly detail-oriented person who is comfortable reading tax guidelines - your mileage may vary).
posted by zippy at 9:12 PM on February 20, 2011

This is all great advice, everyone. I definitely appreciate the response. It looks like the certified services of a professional accountant or lawyer are necessary. My quest lies in those pastures, now.

I guess I had taken the internet tendency to "hack" everything, including the dry banalities of starting a business, to my head. "There's got to be an easy way!" I thought. But this isn't a video game, for crying out loud. This is the real thing.

But my curiosity confounds me yet. If any small business owners in the US have hung their own shingle, with their spouse as a partner, I'd still be super interested in the process you went through.
posted by shiggins at 10:16 PM on February 20, 2011

While I'm not versed in corporations with spouses, the reason you're getting lawyer (or, better, accountant) advice is that the rules are complex and depend on the details of your business if you want near-optimum results. We don't know the details of your business, so that makes it impossible to say with confidence 'register as an LLC in State X and you're all set.'

The different corporate structures have different rules, and which structure is best depends on the kind of multiple factors, but most likely the ones that will decide it are tax-related.
posted by zippy at 1:32 AM on February 21, 2011

My husband and I ran a software business together for 10 years. We set up as an LLC - there are definite advantages in terms of taxes, protecting your personal assets from adverse events in the business and ways of paying yourself. It wasn't horribly complicated to do but we have always used an accountant - he's more than covered the costs of paying him for the savings he's found us and the mistakes we avoided through his expertise.

The major reasons to consider setting up a C corporation rather than an S are if you are expecting outside investment. A couple running a small consulting business will have more protection with an LLC than just filing a DBA but filings are simpler than if you go whole hog with a C corporation. That said, if you are going to pay yourselves with payroll rather than lump sums as consulting income you need to be meticulous about payroll tax filings and that's where an accountant helping you get started is really crucial.
posted by leslies at 5:41 AM on February 21, 2011

You don't need a lawyer. You need a lawyer if you don't know how to and cannot figure out how to do it yourself. Go to your library, there will be many books for you to read about incorporation and this will not cost you anything. You speak about the internet "hacking" things, I'm sure you've googled C Corp, S Corp and LLC and all that, right? There's hundreds of sites that explain the basics.

You seem to think that starting a business with your spouse is a whole new ball game. The fact that phrases like "mom and pop business" and "the family business" exist is because it's quite popular. There is no seperate process for starting a business with a wife as opposed to with another person. There should be some common sense issues to deal with like what happens to the business if you divorce, since that will be awkward, but you'd have to answer the same question if you had a business with a college buddy or anyone else and had a falling out.

Further, if you want more information specific to your snowflake scenario, you're going to have to post a whole lot more information. Net and gross? Both full time and 50/50 involved? Do you own a commercial space? Do you just do this from home and plan on writing off part of your house? Do you plan on hiring employees? Have you been collecting sales tax and remitting it to your state/county? If you haven't been, will your local government be interested in back taxes? Do you plan on offering yourselves health insurance? Do you plan on offering yourselves a retirement plan?
posted by Brian Puccio at 6:02 AM on February 21, 2011

If any small business owners in the US have hung their own shingle, with their spouse as a partner, I'd still be super interested in the process you went through.

We had been running our business for some time, after some research we decided to form an S-corp. We went to our lawyer to have him draw up the articles of incorporation which are pretty much boilerplate. We were asked for a name for our corporation (which our lawyer searched against the names of existing corporations), a tax ID number (we used the SO's SSN) a mailing address, the number of shares we were issuing (some base-10 number) and which of us would serve in the capacity of President, Vice-President, Secretary and CFO. Though it isn't necessary to do so I highly recommend using a lawyer here for the peace of mind it purchases. The process took about 20 minutes and was painless. After that we bought "Corporations for Dummies" which served us quite well.
By far the most important relationship we had was with our accounting firm. Accountants have the benefit of working with lots of clients in similar positions and they see what some do right and some do wrong. Our accountant was always happy to answer any questions we had - we came to treat him as a consultant and I remember thinking that he was easily worth 10 times what we paid him.
posted by vapidave at 6:36 AM on February 21, 2011

All this stuff about LLCs and corporations is way overkill for what you need according to the description of your business.

You were on the right track to begin with on the Qualified Joint Venture. This was a new addition to the tax code in 2007 as part of the Small Business and Work Opportunity Tax Act. It was created for exactly the type of simple business you and your spouse have.

You don't have to create any legal entity or see a lawyer. You and you spouse operate the business as each having a sole proprietorship and split the expenses and income as appropriate for your contributions to the operation.

You each file a one page Schedule C which attaches to your normal 1040. On the Schedule C you indicate your revenues from your business and deduct the expenses for your business. You each pay and accumulate Social Security credits for retirement. You can fill out these forms with a $29 copy of TurboTax. No need to create a partnership and have to generate partnership tax forms. No need to create a corporation with separate business accounts and special corporation tax forms.

For further information search for "sole proprietorship." You will follow everything you find there except that you are both sole proprietors who share a business under the new Qualified Joint Venture rules.

No sense making it complicated. Keep it simple.
posted by JackFlash at 10:23 AM on February 21, 2011 [1 favorite]

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