In Illinois, can a married couple be the joint owners of a sole proprietorship? We have married customers who operate a construction business as a sole proprietorship and state they are the joint owners of the business. The couple files a joint tax return with one Schedule C form listing the business as “John Smith d/b/a Smith Construction.” The couple has a business checking account with our bank on which John Smith and Sally Smith both are listed as owners and authorized signers. When signing loan documents on behalf of the business, the couple each would like to sign as an owner, with “John Smith d/b/a Smith Construction” listed as the borrower. Is this allowable? Our core processor would not allow us to input “John Smith or Sally Smith d/b/a Smith Construction.”

Yes, a married couple may be joint owners of a sole proprietorship in Illinois. However, since sole proprietorships are not separate legal entities apart from their owners, we recommend requiring John and Sally Smith to sign the loan documents in their individual capacity, subject to the caveats discussed below.

Under the Internal Revenue Code, two spouses who run a business together may file a tax return as a sole proprietorship if they fulfill all the requirements for being treated as a “qualified joint venture.” Specifically, the married couple must: (1) file a joint tax return, (2) operate the business as co-owners (and not in the name of an entity such as an LLC), (3) both materially participate in the business, (4) both elect qualified joint venture status on IRS Form 1040, and (5) file separate Schedule Cs (Profit or Loss from Business (Sole Proprietorship)).

Generally, if the couple does not meet these requirements, the sole proprietorship either will be considered to be solely owned by one of the spouses, with the other considered to be an employee of the business, or if considered to be jointly owned and operated, the business will be treated as a partnership. (We note that, if only one of the spouses filed a Schedule C, that may be indicative of a sole ownership, and in such case we recommend verifying by other means whether the sole proprietorship is solely owned by that spouse.)

Regarding the loan documentation, it is well settled in Illinois that “a sole proprietorship has no legal identity separate from that of the individual who owns it,” and a sole proprietor “who does business as a sole proprietor under one or several names remains one person, personally liable for all his or her obligations.” Illinois courts also have held that a sole proprietorship is not subject to legal action as an entity separate from the sole proprietor.

On a related note, an Illinois legal treatise on commercial loan documentation provides that “[a]n individual ‘doing business as’ (d/b/a) under an assumed name should sign only his or her correct legal name on the signature line. The d/b/a may be noted elsewhere in the loan documents, but not in or above the signature line . . . . It should never imply that the d/b/a is a borrowing entity separate and apart from the individual.”

As such, we recommend having John and Sally Smith each sign the loan documents in their individual capacity, without reference to their title as “owner” of the sole proprietorship. However, we caution that if you determine that John Smith is the sole owner of the sole proprietorship, and the couple has not made a joint application for credit, you may risk violating Regulation B if you require Sally Smith to sign the loan documents. Regulation B generally prohibits lenders from requiring the signature of an applicant’s spouse if the applicant meets the lender’s creditworthiness standards and is not applying as a joint applicant.

For resources related to our guidance, please see:

IRS webpage, Election for Married Couples Unincorporated Businesses (“Spouses electing qualified joint venture status are treated as sole proprietors for Federal tax purposes. The spouses must share the businesses’ items of income, gain, loss, deduction, and credit. Therefore, the spouses must take into account the items in accordance with each spouse's interest in the business. The same allocation will apply for calculating self-employment tax if applicable, and may affect each spouse’s social security benefits. Each spouse must file a separate Schedule C (or Schedule F) to report profits and losses and, if otherwise required, a separate Schedule SE to report self-employment tax for each spouse.”)

IRS webpage, FAQs (“A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture: [1] The only members in the joint venture are a married couple who file a joint tax return, [2] The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP), [3] Both spouses materially participate in the trade or business . . . and [4] Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors (PDF) by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 or Form 1040-SR a separate Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040 or 1040-SR), Profit or Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax to pay self-employment tax.”)

IRS webpage, FAQs (“Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a married couple is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.”)

Vernon v. Schuster, 688 N.E.2d 1172, 1176-77 (1997) (“It is well settled that a sole proprietorship has no legal identity separate from that of the individual who owns it. The sole proprietor may do business under a fictitious name if he or she chooses. However, doing business under another name does not create an entity distinct from the person operating the business. The individual who does business as a sole proprietor under one or several names remains one person, personally liable for all his or her obligations.”)

Bartlett v. Heibl, 128 F.3d 497, 500 (7th Cir. 1997) (“A sole proprietorship . . . is not a suable entity separate from the sole proprietor.”)

Tamburo v. Calvin, No. 94 C 5206, 1995 U.S. Dist. LEXIS 3399, at *20-21 (N.D. Ill. Mar. 15, 1995) (“It is well established that a sole proprietorship and its owner are legally indistinguishable, and that a sole proprietor is entitled to bring suit to enforce obligations owed the business. . . . a sole proprietorship ‘has no legal existence apart from [its proprietor] and is not separately suable under Illinois law.’”).

IICLE, Commercial and Industrial Loan Documentation 2018 Edition: Chapter 3 – Borrowing Entities (“An individual ‘doing business as’ (d/b/a) under an assumed name should sign only his or her correct legal name on the signature line. The d/b/a may be noted elsewhere in the loan documents, but not in or above the signature line. D/b/a should be noted in loan documents only if the customer expresses a need for it to be shown. It should never imply that the d/b/a is a borrowing entity separate and apart from the individual.”)

Regulation B, 12 CFR 1002.7(d)(1) (“Except as provided in this paragraph, a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested.”)

Regulation B, Paragraph 7(d)(1), Comment 1 (“Signature of another person. It is impermissible for a creditor to require an applicant who is individually creditworthy to provide a cosigner – even if the creditor applies the requirement without regard to sex, marital status, or any other prohibited basis. (But see comment 7(d)(6)-1 concerning guarantors of closely held corporations.)”)