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Wednesday, January 26, 2022

How Is an LLC Treated in a Divorce?

Have multiple people warned you to keep your professional and personal lives separate? We imagine they have. This practice can work in theory, but you probably know by now that separation of your professional and personal lives can be nearly impossible when you’re a business owner going through a divorce. If you have equity in a business and are facing the end of your marriage, you need a skilled attorney by your side to properly protect your assets. When it comes to representing clients with family law issues, we have decades of experience at Gilmer Law Firm, PLLC.

 

In this article, we explain the basics of what can happen to a spouse’s limited liability company (LLC) in a divorce. 

What Happens When an LLC Member Divorces?

So, how is an LLC treated in a divorce? Is a limited liability company protected from divorce? The short answer is no. Your ownership interest in an LLC can be like any other property you might have to divide or give away in a divorce. 

An owner of an LLC is a “member,” and the portion of the LLC they own is a “membership interest.” The membership interest is the member’s personal property. Because a membership interest is personal property, a family court can divide it equitably in a divorce between an LLC member and their spouse. This can be an untenable result when you’re trying to move on after the dissolution of your marriage. 

Can an LLC Protect You in a Divorce?

Forming an LLC might protect the specific assets of your business when you divorce. But forming an LLC doesn’t necessarily protect your financial stake in your business from your spouse. 

Now that you know that a divorce can affect your LLC, we hope you take precautions to protect your business. There are many ways to do this, but let’s go over some of the basics. 

LLC Asset Protection and Divorce

How you can protect your business from a divorce often depends on timing. The earlier you can put protective measures in place, the better; but all is not lost if you don’t have a business protection plan and you’re already in divorce court. 

Protect Your Existing Business Before You Marry with a Prenuptial Agreement

In a New York divorce, the court divides only marital property, and it leaves separate property alone. In general, marital property is anything you acquire during your marriage. Separate property is anything you acquire before your marriage. Separate property also includes any gifts or inheritance you receive at any time from someone who isn’t your spouse and proceeds from a personal injury claim. 

If you started your business before you married, it’s generally separate property not subject to division in a divorce. However, if your spouse financially contributes to your existing business or their services (at home or work) help your business increase in value, your ownership interest might become divisible marital property. To avoid this, you can enter a prenuptial agreement with a soon-to-be spouse, agreeing that your business is separate property. If the divorce court decides that all terms of your prenuptial agreement were fair when it was signed and still fair when the divorce was initiated, your business can remain untouched in the divorce. How you draft and execute this type of an agreement is crucial to its effectiveness. It’s best to let a skilled divorce attorney draft the agreement language you need to protect what you own. 

Protect Your Business During Your Marriage with a Postnuptial Agreement

Much like a prenuptial agreement, a fair postnuptial agreement can protect your business from divorce proceedings. To be enforceable in a divorce, your postnuptial agreement has to be signed before anyone files for divorce. Also, the terms of your agreement have to be fair at the time of signing and divorce. 

Write a Good Operating Agreement for Your Business

If your ex-spouse receives part of your membership interest, that doesn’t mean they can run your business. Third parties who receive membership interests only have rights to the business’s financial distributions. Under New York law, third parties who receive an LLC member’s membership interest can’t be members of the LLC unless a majority of the LLC’s membership interests consent. You can ramp up this protection against your ex-spouse becoming an LLC member by writing an Operating Agreement that requires a larger amount of consent before a new member can be admitted. Operating Agreements are contracts between LLC members that let them decide their own rules for business ownership and management. 

Hire a Good Attorney

If you didn’t have a chance to use the tactics we mentioned above before filing for divorce, don’t panic. The divorce court takes a lot of matters into consideration when it equitably divides marital property. You have an opportunity to argue before the court to keep your business intact.

When dividing marital property, the court generally looks at your assets and needs and your spouse’s assets and needs. The court also looks at what is fair. 

The court might refrain from giving your spouse a business interest if it is difficult to evaluate your business or divide it in an economically desirable fashion. You may offset your spouse's interest in the business with other valuable property, such as the marital home. Or you may be able to buy out your spouse’s interest by getting a loan. These approaches can be effective, but complex. An experienced attorney knows how to make these arguments and what resources to use to successfully prove your point. 

Our Firm Can Help Protect Your Personal and Professional Interests

Divorce can touch everything you hold dear, but we’re here to minimize the damage. Attorney George Mark Gilmer of Gilmer Law Firm, PLLC has 20 years of experience and a passion for helping families. If you’re getting a divorce in New York City, our firm can give you top-tier representation at an affordable price. Whether your divorce case is legally simple or complex, we can help you in this time of personal and financial distress without breaking the bank. You don’t need to face this alone. You can call us at 718-864-2011 or contact us online. We offer free phone consultations.   



 



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