Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?
According to the IRS, "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 (and should file Form 1065 (PDF), U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a Qualified Joint Venture, or they operate their business in one of the nine community property states."
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 are as follows;
•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.
•Both spouses must elect qualified joint venture status on Form 1040 (PDF) 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 (Form 1040) (PDF), Schedule C-EZ (Form 1040) (PDF), or Form 4835 (PDF) accordingly, and, if required, a separate Schedule SE (Form 1040) (PDF) to pay self-employment tax.