Rev. date: 08/04/2012
Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership unless the spouses elect to be treated as a Qualified Joint Venture or, in a community property state,
Rev. Proc. 2002-69 applies.
A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a “qualified joint venture.” Requirements for a qualified joint
venture:
- The only members in the joint venture are a husband and wife who file a joint tax
return,
- The trade or business is owned and operated by the spouses as co-owners (and not in the name of a state law entity such as an LLC or
LLP),
- The husband and wife must each materially participate in the trade or business,
and
- Both spouses must elect qualified joint venture status on
Form 1040
by dividing the items of income, gain, loss, deduction, credit and expenses in
accordance with their respective interests in such venture and each spouse
filing with the Form 1040 a separate
Schedule C,
C-EZ, or
Form 4835 accordingly, and, if required, a separate
Schedule SE to pay self-employment tax.
Husband and wife businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For
Special Rules for Spouses in Community States see
Rev. Proc. 2002-69 and the
Instructions for Schedule C.
Rev. date: 08/04/2012
A domestic limited liability company (LLC) is an entity:
-
Formed under state law by filing articles of organization as an
LLC.
-
Where none of the members of an LLC are personally liable for its
debts.
-
Must be classified for Federal income tax purposes as if it were a sole proprietorship (referred to as an entity disregarded as separate from its owner), a partnership, or a corporation. However, if the LLC has employees, for employment tax purposes the LLC will be treated as a
corporation.
Generally, if a domestic LLC has:
If the LLC does not make a classification election, a default classification of disregarded entity (single-member LLC) or partnership (multi-member LLC) will apply. The election referred to is made using the
Form 8832 (PDF),
Entity Classification Election. If a taxpayer does not file
Form 8832
(PDF), a default classification will apply. Different classification rules may
apply in special situations, including banks, insurance companies, and nonprofit
organizations that are LLCs.
Rev. date: 08/04/2012
Generally, a closely held corporation is a corporation that:
-
Has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals in the last half of the tax
year.
-
Is subject to additional limitations in the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate
officers.
The definitions for the terms "directly or indirectly" and "individual" are in
Publication 542
, Corporations.
A personal holding company is:
The Income Test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent, and
royalties.
The Stock Ownership Test states that at any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is owned, directly or indirectly, by 5 or fewer
individuals.
A personal service corporation is a corporation where:
-
The main work of the company is to perform services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, the performing arts, or
consulting.
-
Substantially all of the stock is owned by employees, retired employees, or their
estates.
-
Examples may be law firms and medical clinics.
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