Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 6 MIN READ

You just got married. Your single-member LLC did too.

Community property, Rev. Proc. 2002-69, and the paperwork that quietly changes the day the rings go on

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What marriage actually does to an LLC interest
  2. The Rev. Proc. 2002-69 election
  3. Five steps, in order
  4. When the prenup is the right answer
  5. The quiet cost of doing nothing
  6. Sources

single-member LLC does not automatically become a two-member LLC the day you get married. What can change, quietly, is the tax character of the interest and who the IRS thinks owns it. Most founders never notice until the first return after the wedding.

This piece walks through the five things that shift and the order to handle them: operating agreement, community-property law, estate plan, tax election, and the federal beneficial-ownership filing.

What marriage actually does to an LLC interest

In the common-law states (the 41 that are not listed below), the default rule is straightforward. The LLC interest stays titled in the founder's name. Unless you add your spouse as a member by amendment, they are not a member. They have no voting rights, no distribution rights, and no capital account. They have marital rights against the value of the interest in a divorce, and those rights vary by state, but they are not an owner in the partnership-tax sense.

The nine community-property states are different. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin treat property acquired during the marriage, with limited exceptions, as jointly owned by the marital community. An LLC interest funded with community money, or grown in value through a spouse's labor during the marriage, can be community property even when the certificate still reads only the founder's name. Texas Family Code § 3.002 is the canonical statement: "Community property consists of the property, other than separate property, acquired by either spouse during marriage." Separate property is what was owned before the marriage or received by gift or inheritance during it.

The practical consequence: in a community-property state, a spouse can have a community-property interest in the LLC interest without ever being admitted as a member. This is the gap that creates most of the confusion.

The Rev. Proc. 2002-69 election

The IRS addressed this gap for one narrow, common case. A husband-wife LLC in a community-property state, where both spouses own the interest as community property and no one else is a member, may be treated as either a disregarded entity (one owner for tax purposes) or a partnership. Rev. Proc. 2002-69 lets the couple pick, and the pick is durable as long as they file consistently.

If they file as if the LLC is a single entity (typically on a Schedule C inside the joint 1040, or as part of the owning spouse's existing schedules), the IRS will respect disregarded-entity treatment. If they file a Form 1065 partnership return, the IRS will respect partnership treatment. What they cannot do is flip back and forth, or file inconsistently across spouses.

This matters for two reasons. First, a partnership return is more work and more cost, usually without a tax benefit when the only partners are a married couple filing jointly. Second, the self-employment-tax character can change between the two treatments depending on how the spouses allocate services, which has real dollar consequences for Social Security credits and SECA liability.

For founders in the 41 common-law states, Rev. Proc. 2002-69 does not apply. The default rule there is the ordinary one: if the operating agreement names only the founder as a member, the LLC is still single-member and still disregarded, no matter who the founder married.

Five steps, in order

1. Read the operating agreement. Find the definition of "Member" and the section on admission of additional members. Most form agreements require a written admission, signed by the existing members, and some require a capital contribution or an assignment of economic rights. The default is that a spouse is not a member until those formalities run. If the agreement is silent, the state LLC act fills in, and every state act treats membership as admitted, not inherited.

2. Identify the property regime. If you live in one of the nine community-property states, assume community interest until you have a reason to believe otherwise. Pre-marital formation is the strongest protection: an interest funded with separate property and held in the founder's name before the wedding is separate property. An interest grown through either spouse's labor during the marriage creates a community-property claim against at least the appreciation, and in some states the income. A prenuptial or postnuptial agreement can preserve separate-property status for both the interest and the income, and in a community-property state this is the most reliable way to keep an operating business on the pre-marriage side of the line.

3. Update the estate plan. Marriage changes the default intestate heir in every state. If the founder dies without a will, the spouse takes a statutory share, which in most states is either everything (if there are no children from another relationship) or a majority share. For a single-member LLC, that share flows by operation of law unless the operating agreement says otherwise and the will or trust directs the transfer. Check whether the operating agreement has a transfer-on-death clause or a buy-sell at death. If it does not, decide now whether you want the spouse to inherit the interest, a pecuniary legacy funded from the interest's value, or nothing.

4. Decide the tax treatment. If the spouses want joint ownership and live in a community-property state, elect under Rev. Proc. 2002-69 by filing consistently (the election is behavioral, not a form). If the spouses want joint ownership and live in a common-law state, admitting the spouse as a second member converts the LLC to a partnership for federal tax purposes, and a Form 1065 becomes required starting the year of admission. If joint ownership is not the goal, do not admit the spouse and do not file a 1065.

5. Fix the state and federal filings if membership changes. If you admit the spouse as a member in Delaware, file a Certificate of Amendment to the Certificate of Formation only if the public document actually needs to change; in most LLCs it does not, because the Certificate does not list members. The operating-agreement amendment is the real work. For federal beneficial-ownership purposes, the Corporate Transparency Act rule at 31 CFR § 1010.380 requires reporting companies to update their beneficial-ownership report within 30 days of a change. Adding a spouse who then holds 25% or more of the ownership interests, or who exercises substantial control, triggers an update. A spouse with a community-property interest but no formal membership is a harder question, and the honest answer in 2023 is that FinCEN has not written a bright-line rule on community-property spouses. The safer course is to report.

When the prenup is the right answer

For founders who intend to keep the business separate, a well-drafted prenuptial or postnuptial agreement is the cleanest tool. It can carve the LLC interest, its income, and its appreciation out of the community estate in a community-property state, and it can waive a spouse's elective share in a common-law state. Without one, the default rules do work the founder may not want.

A prenup does not change federal tax classification. A disregarded single-member LLC stays disregarded regardless of the marital property regime, because federal tax law follows state-law ownership of the interest, and the prenup fixes that ownership as separate. What the prenup does is prevent the community-property overlay from creating the ambiguity that Rev. Proc. 2002-69 was written to resolve.

The quiet cost of doing nothing

Most founders do nothing on the LLC when they marry, and most of the time nothing visibly breaks. The cases where it breaks are the ones where it matters: a divorce filing that now requires a forensic accountant to trace community contributions into a business that commingled them for a decade, an estate where the spouse and the founder's siblings both have colorable claims, a partnership return the IRS demands three years late with accuracy-related penalties. The cost of the amendment, the election, the updated will, and the 30-day BOI update is small. The cost of untangling the omission is not.

Rule of thumb: in a community-property state, assume the LLC is now jointly owned until a written document says otherwise; in a common-law state, assume it is not until you admit the spouse in writing.

Sources

Keep reading

More from the journal.