Can a married couple operate a business as a sole proprietorship or do they need to be a partnership?

A married couple can operate a business as a sole proprietorship under certain conditions, but they generally need to be classified as a partnership unless they meet specific exceptions.

1. General Rule for Married Couples: Typically, if a married couple jointly owns and operates a business, they are considered partners in a partnership for federal tax purposes. This means they should file Form 1065, U.S. Return of Partnership Income, and not use Schedule C (Form 1040) as a sole proprietor.
2. Qualified Joint Venture (QJV) Exception: A married couple can elect to be treated as a Qualified Joint Venture (QJV) instead of a partnership if they meet the following criteria:
   • Both spouses materially participate in the business.
   • The business is jointly owned and operated by the spouses.
   • The business is not held in the name of a state law entity such as an LLC or LLP.
   • They file a joint tax return.
   • They divide the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in the venture and report them on separate Schedules C or F as sole proprietors.
3. Community Property States Exception: In community property states, a married couple can choose to treat their jointly owned and operated business as either a sole proprietorship or a partnership. The states with community property laws include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
4. Disregarded Entity: If the business entity is wholly owned by a husband and wife as community property and they treat the entity as a disregarded entity for federal tax purposes, the IRS will accept this treatment. This means the business can be treated similarly to a sole proprietorship.

In summary, while the default classification for a jointly owned and operated business by a married couple is a partnership, they can elect to be treated as a sole proprietorship under the Qualified Joint Venture rules or if they are in a community property state and choose to treat the business as a sole proprietorship.

Sources:
Rev. Proc. 2002-69
Publication 541 (3/2021)
Publication 583 (1/2021)
Publication 1635 (2/2014)
Publication 334 (2023)