Q. My husband and I are thinking of starting a business. Can we operate it as a sole proprietorship?

A. No. When two or more people own a business and share in the profits, they are partners. Only one person can own a sole proprietorship. However, if either you or your husband is the sole owner, and the other is an employee, a “sole proprietorship” under the tax law is allowed.

If you are the sole owner of a business, and you have not created a corporation or a limited liability company, you are operating a sole proprietorship. Generally, there can be only one owner in a sole proprietorship. All of the business assets are your personal property and are subject to the claims of all of your creditors, including the IRS.

If you are the co-owner of a business, and you have not created a corporation or a limited liability company, you are operating a partnership. Just as with a sole proprietorship, you have unlimited personal liability for all of the business debts.

Simple business form

A partnership is the simplest business entity you can create. All it requires is an agreement between two or more people, which can be oral or written. Virtually anyone can be a partner. A partner can be an individual, another partnership, a limited liability company, a corporation or a trust.

Partners agree to carry on the business together and share in the profits. Sharing in the profits is the basic test to determine if you are a partner. If you share in the profits – or losses – of the business, you are a partner and, for tax purposes, you are considered to be self-employed.

Married couples

Although married couples often are considered one “person” in the law, marriage does not change the traditional partnership rules. You and your husband would be partners unless you operate your business as a corporation or limited liability company.

You can structure the business so only one spouse is the “owner.” He or she would be the sole proprietor and the other spouse would be an employee of the sole proprietorship for tax purposes. This arrangement, however, has some drawbacks. Both spouses would not have equal say in the conduct of the business, as they would in a partnership.

Filing

Partnerships file Form 1065, U.S. Partnership Return of Income, annually to report income and deductions. Every partner must receive a copy of Schedule K, Partner’s Share of Income, Credits, Deductions, etc.