How Does Divorce Impact an LLC? (What Can You Expect)
If you are considering filing for divorce, it's important to get some idea of how the financial aspects of the divorce might impact your LLC.
Divorce effects on LLCs can come in the form of taxation, considered business income, alimony payments, and property division.
When you own an LLC with your spouse, marital assets may be included in determining property division.
After consulting our team of legal experts and conducting extensive research, we will provide you with a detailed discussion regarding the impact of divorce on an LLC.
- The main impact of a divorce on an LLC is on ownership and rights issues.
- The status of the LLC is determined and classified as a separate asset or a marital property.
- To settle the divorce issue without the intervention of the court, you can draft a prenuptial, postnuptial, or operating agreement.
What are the Implications of a Divorce on an LLC?
The main implication of a divorce on a limited liability company involves the equitable division of marital property between both parties. The proportion may vary depending on the specific state laws where the divorce was filed.
If your LLC is marital and you file for divorce, the court will determine which and how the assets will be divided based on the significant time or money spent on the business by either spouse.
When determining the assets of a limited liability company, all real estate and business interests are considered marital property.
A court might also require one spouse to pay more for marital property to equalize the assets up to an agreed-upon level, or it may have a different approach, depending on your specific divorce case.
Divorce courts are allowed to divide every marital asset in whatever manner they see fit.
The marital property division that you will be subject to is at the discretion of your divorce court but can be predicted by reviewing previous cases decided in your local jurisdiction.
A marital property pertains to properties acquired by a couple in the course of their marriage. This includes real estate, property investments, vehicles, and other material possessions under both their names.
Property acquired by the couple during the marriage is subject to property division.
The following criteria are how marital property is categorized:
- In many states, property acquired by gift, bequest, or descent during the marriage is considered to be marital property. It is important to verify state laws regarding property classification.
- In addition, property may be classified as marital property if purchased with funds from a joint bank account during the marriage.
- If purchased before the marriage but which is not held in its individual name
- Intangible assets acquired during the marriage may also be considered property subject to property division.
If a property is a marital property, it must be divided somewhat per state laws that are equitable to both parties during the divorce.
Non-martial property is anything that was either owned before marriage, acquired by gift or inheritance and kept separate during the marriage.
Therefore, anything considered non-marital would not be subject to division with your spouse as part of a divorce settlement.
However, the distinction between marital and non-marital property can sometimes be complicated, so it is advisable to consult with a competent attorney when you have property questions.
Is my LLC Marital or Non-Marital Entity?
According to the law, a limited liability company may be classified as marital or non-marital depending on when it was created.
If the entity was formed before the marriage, then it falls under non-marital. If it was created during the marriage, it is categorized as a marital business.
However, several factors may affect the status of the LLC:
- If the marital property is invested in the business
- If the spouse contributed to the limited liability company in any way
- If divorce conditions are included in the LLC Operating Agreement
Only marital assets are considered marital property. Property is deemed marital if acquired during the marriage or gifted to you by your spouse during the marriage.
Non-marital assets include any assets that were acquired before the marriage, which provides for assets received by inheritance or an award for personal injury claim (provided they did not receive marital assets in exchange).
If your LLC was obtained during your marriage or if marital assets were invested in the limited liability company, it is considered marital property.
If marital assets were not used in creating your LLC, they are regarded as separate property.
How Can I Protect My LLC Ownership From Divorce?
To protect your LLC ownership from divorce, include a language in the operating agreement and draft a prenuptial and postnuptial agreement.
You could ask your spouse if they are willing to voluntarily give up their LLC membership interest.
Divorce.com CEO Elizabeth Pharo emphasizes the importance of clear asset definition agreements for couples.
These agreements can help determine if LLC ownership is separate or shared, ensuring business continuity and stability even during a split and preventing significant disruptions.
If you do not have a family law attorney, it's always best to consult with one to protect your business interests.
A family law attorney can review your operating agreement and advise you on what protection you should have to protect your business interest.
At the minimum, it's good practice to include language in your LLC Operating Agreement that states that any membership interest or share of profits is not subject to attachment by creditors, including divorce courts.
This will ensure that no creditor can take your interest or profits from an outside creditor, such as a divorce court.
LLC Operating Agreement
Most states require that an LLC Operating Agreement is in place to form and operate an LLC.
Suppose your operating agreement does not include language protecting your membership interest.
In that case, it's important to consider adding this protective language before filing for divorce or other legal action impacting your interests.
If you have other marital assets such as real estate or other business interests, it's important to protect those properties from being transferred to your spouse as well.
The operating agreement can set out rules for how profits and other personal and business assets should be split, whether one spouse will leave the business upon divorce, or if they would like the other spouse to continue managing the company.
Other considerations include:
Membership interest and other income:
- How will the membership interest and other income be split between spouses?
- If your LLC is a multi-member LLC, does each member have an equal vote on how the business decisions are made?
- What contributions each spouse made to establish and grow the company?
- How will each spouse's contribution be evaluated?
- Who is responsible for managing the LLC during and after the divorce?
- Will one spouse manage the business while the other spouse has a passive role, or will they both actively manage the business together?
- If divorce occurs, what are the terms for how the LLC interest will be split?
- Will other income received by another spouse be considered separate income or marital property?
- If children are involved, does one spouse agree to stay in business while the other spouse has primary custody of the children?
Prenuptial and Postnuptial Agreements
Prenuptial and Postnuptial Agreements can also be used to protect divorce assets from being subject to an operating agreement or court-ordered settlement.
1. Prenuptial Agreement
In general, a prenuptial agreement is a written contract created before a couple marries so that the divorce property division of marital assets is not subject to divorce court discretion .
Your divorce court will abide by the divorce agreement you create with your spouse during a divorce.
2. Postnuptial Agreement
A postnuptial agreement is similar but typically created after the couple has married so that divorce property division of marital assets is not subject to divorce court discretion.
Your divorce attorney can help you create a prenuptial agreement or postnuptial agreement that will protect your business interest and divorce assets during divorce.
How is an LLC Treated in a Divorce?
In a divorce, an LLC is treated as a business entity, and the property that it owns is not subject to property division through the divorce courts.
This means that if your spouse is awarded 50% ownership of your LLC in a divorce settlement, they will only have the right to receive the profits from the company rather than owning half of the company.
However, suppose your LLC is created before or after marriage, and you fail to create a separate business agreement between spouses.
The ownership interest held by each spouse in an LLC will be subject to divorce property division.
This means that during divorce proceedings, one spouse's share of the company may be awarded to the other spouse as part of the divorce property settlement.
Regardless, if your business interest is subject to property division during divorce proceedings, it's important to update your operating agreement to follow the rules during divorce court proceedings.
It's also important to update other arrangements such as prenuptial and postnuptial agreements to apply them during divorce proceedings.
Do LLC Assets Get Divided in a Divorce?
LLC assets will not get divided in a divorce unless a multi-member LLC owns the business interest, and it's disputed how ownership interest will be divided between co-owners.
In a divorce, marital assets are divided between spouses.
Does My Wife Get Half My Ownership Interest in My LLC?
In a divorce, your wife may get half of your LLC ownership interest if the settlement is decided in court. However, a prenuptial or postnuptial agreement can allow you to keep the business.
So, How does Divorce Impact an LLC?
A divorce impacts an LLC based on several factors. The primary consideration depends on whether the business was formed before or during the marriage. The contributions of either spouse in terms of time and capital are also a factor.
There are several ways to protect the business from court-ordered settlements. You can draft a prenuptial, postnuptial, or a language in the Operating Agreement.
If you need legal advice, consult with professional online legal services.