Running a business with your spouse
Each year, hundreds of New Hampshire married couples form joint ventures together, and many of these couples turn to New Hampshire attorneys to do this.
Helping their attorney might include, for example, planning with the couple and drafting an operating agreement for them for their spouse LLC. Even the operating agreements for husband-wife LLCs involve significant but difficult federal income tax issues, Social Security tax issues, and IRC Section 199A issues. (Section 199A is the IRC section that offers 20% annual federal income tax deductions to members of multi-member limited liability companies if their limited liability companies are properly structured.)
However, in such a joint arrangement of married couples, there is at least a theoretical possibility of conflicts of interest between the spouses. These conflicts can arise, for example, if the marriage in question is the second marriage of one or both spouses and one or both spouses have children from their first marriage. In this situation, there may be disputes between the spouses as to who will inherit their LLC memberships if they die while they are members.
Additionally, if one spouse devotes more time or talent to the joint venture than the other, there may be disagreements between them over time commitments and how to split the income from the joint venture. joint venture. Thus, New Hampshire’s rules of legal ethics require that attorneys who assist in joint spousal agreements (and, for that matter, simultaneously represent two or more non-spouses in a legal matter) inform their clients of these possible conflicts. . And legal ethics require these attorneys to provide these clients with a written agreement – often referred to as a “joint representation agreement”. The purpose of joint representation agreements is to inform each of the spouses in writing of the potential advantages and disadvantages for them of joint representations and, if they feel that their interests are substantially aligned, to indicate this by signing the agreement. However, even if a lawyer dealing with joint husband-wife representation adequately discusses the above pros and cons with the couple in person and in a joint representation agreement, it will often be helpful for spouses in the process. ‘have their own understanding independent of them.
In short, the main advantages for a married couple of joint representation are as follows:
■ If the couple’s interests are substantially aligned, neither will need an independent lawyer.
■ Where both parties to a multiparty agreement have their own independent lawyers, these lawyers will have a duty to raise for their clients issues that might otherwise never arise between those clients.
Thus, joint representation can save the couple legal fees they might owe if each is represented by their own lawyer, but it will never be helpful to them. The main disadvantages of joint representation for each member of a married couple are:
■ Loyalty. In joint representation, a lawyer will have no obligation to either spouse to protect the interests of that spouse in the relevant case. On the contrary, the lawyer will have the duty only to seek a reasonable compromise of these interests and to reflect this compromise in the transaction documents. The compromise should be reflected, in the case of a mixed husband-wife LLC, in the LLC’s operating agreement.
■ Confidentiality. In joint representation, the lawyer will have no obligation to maintain the confidentiality of confidential information about either spouse that the spouse discloses to the lawyer. On the contrary, the lawyer will have the affirmative duty to disclose this information to the other spouse.
■ No attorney-client privilege. If the spouses who are parties to a joint representation sue each other over their joint agreement, neither spouse can assert attorney-client privilege to protect their information on the agreement from disclosure to the other spouse.
■ Customer responsibility. Since the two spouses in a joint representation will not have an independent lawyer, each spouse must act as their own lawyer to a greater extent than in a non-joint representation.
■ “Joint authorization. In joint representations, the lawyer cannot act with third parties regarding the transaction in question without the authorization of both spouses. Obtaining this authorization can be cumbersome and time consuming.
■ Termination of joint representation. When attorneys represent a married couple in joint representation, either spouse may terminate representation at any time for any reason, and attorneys may terminate such representations if they discover conflicts between spouses of which they were not initially aware. But in both cases, mutual clients normally have to pay their lawyer for their work until the time of termination.
To sum up: In joint husband-wife trade agreements, as in other multi-party agreements, joint representations can be useful. But they can also involve serious pitfalls. Use them with care.
(John Cunningham is a Concord attorney representing McLane Middleton, PA. His practice focuses on LLC trainings, general business and tax law, advising clients under IRC Section 199A, and planning. He can be contacted at (603) 856-7172, [email protected] or llc199A.com.)