Avoid This Husband-and-Wife LLC Mistake

Tax Planning


My wife and I currently have a flow-through LLC in which we are both members. My wife is the real estate sales professional. Her broker pays the LLC and gives her a 1099 at the end of the year.

I’m the fixing, research, how-to-add-numbers, and advertising guy.


We think we could benefit from a Section 105 health reimbursement arrangement (HRA).

  • Would a Section 105 plan work with our husband-and-wife LLC?
  • If not, what entity do we need to make this work?
  • Can the 105 plan cover the full year?

We currently have a health savings account (HSA). If we set up the 105-HRA, can we still add to the HSA, for tax savings?


The Section 105 plan will not benefit the spouses in a husband-and-wife partnership.

To make the 105-HRA plan work, you need your wife to operate as a sole proprietorship with you as the sole employee. You may have that in place now—but you may not be aware that the proprietorship exists.

You described your entity as a husband-and-wife LLC. With no election for taxation as a corporation, the husband and- wife LLC is a partnership. In your case, that would be the worst type of entity for tax savings for you and your wife.

One Easy Way to Make the Partnership a Sole Proprietorship

If you live in a community property state, you can elect to treat the husband-and-wife LLC as a sole proprietorship by simply filing your tax return as a sole proprietorship on Schedule C of your Form 1040.

105-HRA Effective Date

Your 105-HRA may not reimburse a medical care expense incurred before

  • the date the 105-HRA is in existence, 
  • or the date an employee first enrolls in the 105-HRA.

This means you need to get the 105-HRA plan in place now so that you can start reaping the benefits right away.

HSA with the HRA

As to the HSA in combination with the 105-HRA, be careful here. In general, the HSA is not compatible with the Section 105 plan. 

But if you have a high-deductible health plan and no HSA, then there’s no impediment to the Section 105 plan paying for all medical expenses, including the high-deductible health plan.


The husband-and-wife LLC taxed as a partnership is a poor entity for tax savings.

If you live in a community property state, you can turn a husband-and-wife partnership into a sole proprietorship by simply filing a Schedule C with your tax return.

In a husband-and-wife business that’s operated as a proprietorship, the Section 105-HRA is a terrific tax savings vehicle for the family’s medical expenses.

If you desire both an HSA and a Section 105-HRA, know first that the plans are not compatible and that you need to follow the rules.

Christopher Ragain

My name is Christopher Ragain, I am the founder of Tax Planner Pro.  I love helping small business owners find creative and legal ways to beat the TaxMan.  My team and I love to write and you can find all of our insights on this blog!

Related Posts

Stay in Touch

Thank you! Your submission has been received!

Oops! Something went wrong while submitting the form