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Running a business with your spouse

  • John Cunningham

For the Monitor
Published: 10/2/2021 1:49:42 PM

Every year, hundreds of New Hampshire married couples start joint businesses together, and to do so, many of these couples use the help of New Hampshire lawyers.

Their lawyer’s help may consist, for example, of planning with the couple and drafting for them an operating agreement for their husband-wife LLC. Even operating agreements for husband-wife LLCs involve important but difficult federal income tax issues, Social Security Taxes issues and issues under IRC section 199A. (Section 199A is the IRC section that provides annual 20% federal income tax deductions to the members of multi- member LLCs if their LLCs are properly structured.)

However, in any such married-couple joint deal, there is at least a theoretical possibility of conflicts of interest between the spouses. These conflicts may arise, for example, if the marriage in question is the second marriage for one or both spouses, and one or both spouses have children from their first marriage. In this situation, there may be conflicts between the spouses about who will inherit their LLC memberships if they die while they are members.

In addition, if one spouse will be devoting more time or talent to the joint business than the other, there may be disagreements between them about time commitments and about how to share joint business income. Thus, New Hampshire legal ethics rules require that lawyers assisting in joint deals between spouses (and, for that matter, simultaneously representing two or more non-spouses in a legal matter) advise their clients about these possible conflicts. And legal ethics rules require that these lawyers provide these clients with a written agreement — often called a “joint representation agreement.” The purpose of joint representation agreements is to advise each of the spouses in writing about the potential advantages and disadvantages to them in joint representations and, if they believe that their interests are substantially aligned, to so indicated by signing the agreement. However, even if a lawyer handling a husband-wife joint representation adequately addresses the above advantages and disadvantages with the couple in person and in a joint representation agreement, it will often be useful for the spouses to have their own independent understanding of them.

Briefly, the chief advantages to a married couple of a joint representation are these:

■If the couple’s interests are substantially aligned, neither of them will need independent counsel.

■When both parties to a multi-party deal have their own independent lawyers, these lawyers will have a duty to raise issues for their clients that might never otherwise arise between these clients.

Thus, the joint representation may save the couple legal fees that they might owe if each is represented by his or her own lawyer but that won’t ever do them any good. The chief disadvantages of a joint representation for each of the members of a married couple are these:

■Loyalty. In a joint representation, a lawyer will have no duty to either spouse to protect that spouse’s interests in the relevant deal. Rather, the lawyer will have a duty only to seek a reasonable compromise of these interests and to reflect this compromise in deal documents. The compromise must be reflected, in the case of a husband-wife multi-member LLC, in the LLC’s operating agreement.

■Confidentiality. In a joint representation, the lawyer will have no duty to maintain the confidentiality of any confidential information about either spouse that the spouse discloses to the lawyer. Rather, the lawyer will have an affirmative duty to disclose that information to the other spouse.

■No attorney-client privilege. If spouses who are parties to a joint representation ever sue each other with respect to their joint deal, neither spouse may assert the attorney-client privilege to protect his or her information about the deal from disclosure to the other spouse.

■Client responsibility. Because both spouses in a joint representation will have no independent lawyer, each spouse must act as his or her own lawyer to a greater degree than in a non-joint representation.

■“Joint authorization. In joint representations, lawyers may take no action with third parties with respect to the deal in question without the authorization of both spouses. Obtaining this authorization can be cumbersome and time-consuming.

■Termination of joint representation. When lawyers represent a married couple in a joint representation, either spouse may terminate the representation at any time for any reason, and lawyers may terminate these representations if they discover conflicts between the spouses of which they were initially unaware. But in either case, the joint clients normally must pay their lawyer for his or work up to the time of the termination.

To sum up: In husband-wife joint business deals, as in other multi-party deals, joint representations can be useful. But they may also involve serious pitfalls. Use them with care.

(John Cunningham is a Concord lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. He can be reached at(603) 856-7172, lawjmc@comcast.net, or llc199A.com.)

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