Wednesday, March 4, 2009

Are a Husband and Wife Considered One Member of an LLC?

Question: My wife and I are members in a LLC in New Jersey. We would like to remove her so tax filing will be easier. Is this possible and how would we go about it?
Answer: I assume you are referring to the fact that a single member LLC can elect to be a disregarded entity for tax purposes and, thus, not file a separate federal tax return. In the case of an LLC that is a disregarded entity for federal income tax purposes, the owner reports the income / loss from this business on his individual income tax return, form 1040, schedule C or perhaps Schedule E if the LLC is solely involved in real estate rental activity. The advantage of the disregarded entity is avoiding the need for a federal tax return (and, also, the state return in most states). First, let's look at the issue of whether you and your wife may qualify as one member for tax purposes in order to take advantage of the disregarded entity rule. In the nine community property states, a husband and wife who own an LLC interest as community property can be treated as one member under Rev. Proc. 2002-69, 2002-2 C.B. 831. Unfortunately, New Jersey is not a community property state, therefore, you are considered two members.

Although it does not apply to your case, the law recently changed allowing a husband and wife who both materially participate in a business not organized as a legal entity under state law to be disregarded for tax purposes (i.e., treated as a sole proprietorship). See Election for Husband and Wife Unincorporated Businesses. It's a nice option where the business circumstances do not make the liability protection offered by incorporating or forming an LLC necessary.

Back to your initial question: how is a member removed from a New Jersey LLC? The first step is to check if the state requires a form to be filed at the time the member withdraws. I did not see a form for this on web site of the NJ Division of Revenue. My assumption is that no form is filed with the state at the time of the withdrawal; however, they are made aware of the change in membership with next annual filing. I invite you to contact the Division of Revenue to confirm my above assumption. If you have a written operating agreement, it may specify the procedure for withdrawal of a member. If not, I recommend that the withdrawing member sign a notice of withdrawal and deliver it to the other members. There is no set form for a notice of withdrawal from an LLC (just a short letter or memo with the withdrawing member's signature should suffice).

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