When a couple decides to get a divorce, it’s not just their personal life that gets affected. Their finances, assets, and properties are also subject to division, including any businesses they own. If the couple owns a limited liability company (LLC), it can be a bit more complicated than a straightforward division of assets. In this article, we will discuss how an LLC is treated in a divorce.
Understanding LLCs
Before we dive into the treatment of LLCs in divorce, it’s important to understand what an LLC is. An LLC is a type of business structure that offers limited liability protection to its owners, meaning that they are not personally liable for the debts and obligations of the company. Instead, the company’s assets are used to pay off any debts or obligations.
LLCs can be owned by one or more individuals, who are called members. Members can be individuals, corporations, or other LLCs. Each member’s ownership interest is represented by a percentage, which determines their share of the company’s profits and losses.
How an LLC is Treated in Divorce
When it comes to divorce, the treatment of an LLC depends on several factors, including the state where the LLC is located and the terms of the LLC operating agreement.
Community Property States
In community property states, any property or assets acquired during the marriage are considered community property and are subject to division in a divorce. This includes any ownership interests in an LLC. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In these states, the ownership interest in an LLC is considered community property if it was acquired during the marriage, regardless of whether it was purchased with community funds or separate funds. Community funds are any assets earned or acquired during the marriage, while separate funds are assets that were owned prior to the marriage or were received as gifts or inheritance.
Once the ownership interest in the LLC is considered community property, it will be subject to division in the divorce. The court will determine the fair market value of the LLC and divide it between the spouses based on their ownership percentage.
Equitable Distribution States
In equitable distribution states, which include all states except for the community property states listed above, the court will divide property and assets based on what it deems to be fair and equitable, taking into account several factors such as the length of the marriage, the income and earning potential of each spouse, and the contributions of each spouse to the marriage.
In these states, the court will consider the ownership interest in an LLC as marital property if it was acquired during the marriage. The court will then determine the value of the ownership interest and divide it between the spouses based on what it deems to be fair and equitable.
LLC Operating Agreements
LLC operating agreements can also play a role in how the LLC is treated in a divorce. An operating agreement is a legal document that outlines how the LLC will be managed and how profits and losses will be allocated to the members.
If the operating agreement includes a provision for the transfer of ownership interests, the spouses may be required to follow that provision in the divorce. For example, if the operating agreement requires the approval of all members for the transfer of an ownership interest, the spouse who is not a member of the LLC may need to obtain the approval of the other members before receiving the ownership interest in the divorce.
Additionally, the operating agreement may include a provision for a buyout in the event of a divorce. This provision would allow the other members of the LLC to buy out the ownership interest of the spouse who is getting divorced, which would allow the business to continue operating without the involvement of the divorcing spouse.
Conclusion
Divorce can be a complicated and emotional process, and when an LLC is involved, it can add an extra layer of complexity. It’s important to understand the treatment of an LLC in a divorce and how it will be divided between the spouses.
In community property states, the ownership interest in an LLC is considered community property and will be subject to division in the divorce. In equitable distribution states, the court will divide the ownership interest based on what it deems to be fair and equitable. The LLC operating agreement can also play a role in how the ownership interest is divided, especially if it includes provisions for the transfer of ownership interests or a buyout in the event of a divorce.
It’s essential to consult with an attorney experienced in business law and divorce to help navigate the process and ensure that your interests are protected. They can help you understand your rights and obligations under the law and help you negotiate a fair settlement that considers the best interests of all parties involved.
In summary, the treatment of an LLC in a divorce can be complicated, but with the right legal guidance and understanding of the law, you can work towards a fair resolution that protects your interests and allows the business to continue operating.