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.
Filing for divorce is a major life event and potentially can impact many aspects of your life, including your finances.
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 such as cars or homes may be included in determining property division.
The answer to the question of how your divorce will affect your LLC ultimately depends on what type of property you acquired during your marriage and how it is divided with your spouse.
Property acquired by the couple during the marriage is subject to property division.
In many states, property acquired by gift, bequest, or descent during the marriage is considered to be marital property.
In addition, property may be classified as marital property if purchased with funds from a joint bank account during the marriage.
Also, the property can even be classified as marital property if purchased before the marriage but which is not held in its individual name.
If a property is a marital property, it must be divided somewhat in accordance with state laws that are equitable to both parties during the divorce.
Intangible assets acquired during the marriage may also be considered property subject to property division.
Non-martial property is anything that was either owned prior to 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 Married or Non-Marital?
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 LLC, it is considered marital property.
If marital assets were not used in creating your LLC, they are regarded as separate property.
How Is Property Divided During a Divorce?
If your LLC is marital and you file for divorce, the divorce court will determine which marital assets will be split between the spouses.
Generally, property acquired during the marriage is divided 50/50 between both parties, especially in those community property states like Texas and Washington.
In other states, marital property is not always split down the middle. The court might consider if either party spent significant time or money on the marital estate.
When determining marital assets of an LLC, all real estate and business interests are considered marital property regardless of if it was a title in the name of the marital estate.
A court might also require one spouse to pay more for marital property to equalize the marital 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 marital property in whatever manner they see fit, depending on the case.
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.
How Can I Protect My LLC Ownership From Divorce?
You could ask your spouse if they are willing to voluntarily give up their LLC membership interest, or you may want to include language in the operating agreement that will protect your interest during a divorce.
If you do not have any family law attorney, it's always best to consult with a family law attorney in order to protect your business interests.
A family law attorney can review your operating agreement and advise you 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.
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 business interests.
If you have other marital assets such as real estate or other business interests, it's important to protect those other marital assets from being transferred to your spouse as well.
The operating agreement can set out rules for how profits and other 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 each spouse made contributions to establish and grow the company?
- How will each spouse's contribution be evaluated?
- Who is responsible for managing the LLC during and after 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 children?
Prenuptial and Postnuptial Agreements
Prenuptial and Postnuptial Agreements can also be used to protect business interests during the divorce process.
In addition, they can be created to protect divorce assets from being subject to an operating agreement or other divorce property settlement agreements.
In general, a prenuptial agreement is a written contract created before a couple marries so that 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.
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 proceedings.
How is an LLC Treated in a Divorce?
In most cases, an LLC is treated as a business entity, and 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.
In that case, 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.
Finally, it's important to create an agreement between spouses that outlines how business matters will be handled during divorce proceedings.
Do Business Assets Get Divided in a Divorce?
In a divorce, marital assets are divided between spouses.
However, business interests or other business assets may not be subject to property division unless a multi-member LLC owns the business interest, and it's disputed how ownership interest was split between co-owners.
Does My Wife Get Half My Business in a Divorce?
In a divorce, marital assets owned by a spouse are subject to property division between spouses.