How Husband and Wife Business Partners Make it Work

How Husband and Wife Business Partners Make it Work
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Many small businesses are run by a husband and wife team. Most states view sole proprietorships owned by a married couple to be a partnership for legal purposes even if the business is listed on record as a sole proprietorship. This can have adverse repercussions if personal misunderstandings between the spouses or domestic problems begin to interfere with the day-to-day running of the business.

To prevent the intermittent tiffs between husband and wife from affecting business prospects, it is preferable to draw up basic guidelines for how the business will be run. The spouse team should lay down an agreed business plan before launching the business and firmly resolve that no family feuds will be allowed to influence or interfere with business affairs.

Tax Implications

Hiring family members is one of the benefits of running your own business. The standard employment tax for spouse-owned businesses differs from tax laws that apply to other hired employees. If a family business is so structured that one spouse is declared an employee, then the second spouse is deemed an employee under income tax and FICA (Social Security and Medicare) dispensation.

If this employer-employee relationship is not strictly in force and if the second spouse assumes equal or substantial responsibility in running the business and contributes to the capital to the business, then the business is considered a partnership and the law requires the business’s income to be reported on Form 1065 for partnership Income.

Enacted in 2007, the Small Business and Work Opportunity Tax Act stipulates that joint ventures of married couples need not be automatically treated as partnership for federal tax purposes. This means that each spouse accounts for his or her respective share of income or loss on the appropriate form. Treating the husband-wife owned business as a sole proprietorship instead of a partnership venture usually results in lower tax liability.

Consequences of Divorce

For a husband and wife owned business, everything goes smoothly as long as there is no marital discord, legal separation, or divorce. When the business is a partnership, a divorce can seriously impede the progress of the company and constitutes challenges to both spouses. There are instances of couples who are legally divorced but continue as business partners to take into account the larger interests of the business and the welfare of the employees. In such uncommon instances, it is critically important that the parties put in place appropriate employment and shareholder agreements.

It is, however, rare that divorced partners agree to cooperate and continue as business partners after a divorce. It is more common for one of the spouses to buy the entire business and pay off the other partner. In most cases, the buying out arrangements entail staggered payments to the departing partner over time, but sometimes a lump sum payment is made. It is also possible for the couple to completely sell off the company to a third party and share the income from the sale.

Running a Business as a Married Couple

Adequate research on married business partners has not been conducted and the data available is scarce and not wholly indicative of the true picture. However, data that are available suggest that the practice of running a business as a married couple remains both popular and successful.

A business owned by two non-related partners typically targets high growth, brings in heavier investment, and attempts a more aggressive management style. Though couples often enter into business relationships together, the division of labor is usually done along traditional gender lines. Further, the husband-wife teams often compromise on business objectives and opt instead for a more agreeable family life and spending time together.

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