When a married couple that owns a business or an LLC together decides to divorce, generally, their LLC will be treated as part of the marital estate and divided between the spouses according to their respective interests in the separate property.
However, if one spouse's separate property was used to form or finance the LLC, that spouse may be able to keep the LLC intact, separate from the marital estate.
Drawing on our expertise and knowledge of Tennessee's legal framework, we’ll address key considerations such as asset division, ownership rights, and the potential impact on the LLC's operations.
In this article, we aim to clarify what you can expect while navigating an LLC after a divorce in Tennessee.
Quick Summary
- The decision to classify the LLC as marital or non-marital is crucial, as it determines how separate property acquired by the LLC will be treated in the event of a divorce
- Marital property is divided equitably, while the separate property remains with its respective owner and is not subject to division
- To protect your ownership of an LLC during a divorce, it's important to ensure proper legal arrangements
Is My LLC Married or Non-marital?
One of the most important decisions you’ll make when setting up your LLC is whether it will be marital or non-marital. This decision determines how separate property the LLC obtains will be treated in the event of a divorce.
Generally, marital property is divided evenly between spouses in a divorce.
However, if the LLC is marital, any separate property acquired by the LLC will be considered marital property divided evenly between spouses [1].
Non-marital property and LLCs, on the other hand, are not subject to the same rules. Separate property acquired by a non-marital LLC is considered separate property and will not be divided between spouses in a divorce, unlike marital property.
Which type of LLC should you choose? It depends on your circumstances of separate property division.
For example, suppose there is a possibility that you will be getting a divorce in the future.
In that case, you should probably create a non-marital LLC to protect those separate property assets from being divided evenly between spouses.
In any case, it's important to understand the implications of choosing marital or non-marital status when setting up your LLC.
How Is Marital Property Divided in Tennessee during a Divorce?
In Tennessee, marital property is generally divided equitably between the parties. This does not mean that each party will receive an equal share but rather that the court will consider several factors to reach a fair result.
These factors include the length of the marriage, each party's income, marital misconduct, whether one party supported the other, and any marital fault.
There is no formula that the court must follow in deciding marital property division. Generally, the separate property division will depend on the unique circumstances of each case.
If the parties can reach an agreement concerning separate property division between themselves, their agreement can be presented to the court and will usually be approved as long as it is fair.
How can I protect my LLC ownership from divorce?
You can protect your LLC ownership from divorce if you own an LLC and are concerned about how a potential divorce could impact your ownership in the company.
Here are some steps you can take to protect yourself:
- Ensure the LLC is set up as a marital or separate property entity
- Ensure that marital or separate assets are not commingled
- Make sure you have an agreement for marital support in case of divorce
- Make sure to have a buy-sell agreement in place
- Hold marital and non-marital property separate
- Don't commingle marital and personal assets
- Protect your social security benefits
You can help protect your LLC ownership during a divorce by taking these steps. However, remember that every situation is different, and you should always consult with an attorney to get specific advice for your situation.
For example, suppose there is a possibility that you will be getting a divorce in the future. In that case, you should probably create a non-marital LLC to protect those assets from being divided evenly between spouses.
In any case, it's important to understand the implications of choosing marital or non-marital status when setting up your LLC.
Prenuptial and Postnuptial Agreements
A prenuptial agreement is a contract made by two individuals prior to marriage, where the rights and obligations of each individual pertaining to certain assets are laid out [2].
In divorce cases, these agreements state which spouse will gain what assets as part of the settlement.
Postnuptial agreements are similar to prenuptial agreements but are made after marriage [3]. They can be used to modify or add to the rights and obligations laid out in a prenuptial agreement or address assets not covered in the original agreement.
Both prenuptial and postnuptial agreements can benefit couples who own a business together. In the event of a divorce, a prenuptial or postnuptial agreement can help to ensure that the company will have an equitable division between spouses.
FAQs
Who Keeps the Business in a Divorce?
In a divorce, the person who keeps the business depends on various factors such as the type of business, its value, and applicable laws.
In Tennessee, one spouse purchasing the other's interest in a business is one way to avoid potential issues with the division of marital property.
Is Tennessee a 50/50 State for Divorce?
Tennessee is not a 50/50 state for divorce. Instead, the state follows an equitable distribution approach. Marital assets and debts are divided fairly, but not necessarily equally. The division is based on various factors determined by the court.
Who Will Divide Your Property in Tennessee’s Divorce Law?
In Tennessee's divorce law, the court will divide the marital property equitably between the spouses. Equitable distribution considers various factors, such as each spouse's contributions and economic circumstances, to determine a fair division of property.
So, What Can You Do to Protect Your LLC From Divorce?
To protect your LLC from divorce, consult with qualified legal services specializing in business law.
They can help you create a solid prenuptial agreement or establish an operating agreement that addresses potential divorce scenarios. This ensures the protection of your business interests.
If you are already married and haven’t signed a prenuptial, it is still not too late to form an agreement. Have a heart-to-heart conversation with your spouse and decide whether to address your assets in a postnuptial agreement.
This way, in case of a divorce, you have a guarantee that your joint business assets are divided fairly.
References
- https://www.maritallaws.com/states/tennessee/property-division
- https://www.nycbar.org/get-legal-help/article/family-law/marital-agreements/prenuptial-agreements/
- https://www.investopedia.com/personal-finance/postnuptial-agreements-more-couples-signing-them-are-they-enforceable/
