Founder
Divorce is never easy, especially when it comes to dividing assets that are not only financially significant but also personally meaningful. If you are a business owner, you understand how much effort, time, and dedication it takes to build and maintain a successful company. Seeing your business interests potentially divided during a divorce can be overwhelming. But before letting stress take over, it’s important to understand your options, including what may happen to an LLC during a divorce and the strategies you can use to protect your business interests. Keep reading for tips from the Orlando Family Team on protecting your LLC during a divorce.
Protecting Your LLC During a Divorce: What You Need to Know
A Limited Liability Company (LLC) can be considered a marital asset, which means that a spouse’s interests in the LLC may be subject to equitable division in a divorce. As an LLC owner or “member,” you hold a membership interest, which is essentially a property interest like any other asset and could be divided during the divorce process.
Key Points About LLCs in Divorce:
- LLC as Marital Property: An LLC can be deemed a marital asset, and your spouse’s interest in the LLC could be subject to equitable division.
- Membership Interest: Your membership interest is treated as a property interest similar to other marital assets.
- Protection Limits: Although forming an LLC may protect certain assets, the LLC itself is not fully safeguarded from division in a divorce.
Understanding this is crucial, especially if you are considering ways to safeguard your business. Fortunately, there are steps you can take to protect your LLC from becoming a point of contention during divorce proceedings.
How to Protect Your LLC in the Event of Divorce
While an LLC is not entirely protected from equitable division, there are several ways to limit the risk of having your business impacted by a divorce. Proactive planning is key, and several strategies, including prenuptial agreements, postnuptial agreements, and proper LLC documentation, should be considered.
Prenuptial or Postnuptial Agreement
A prenuptial or postnuptial agreement is one of the most effective ways to protect your LLC in the event of a divorce.
- Prenuptial Agreement: This agreement between two soon-to-be spouses outlines how property, including business interests, will be divided in the event of a divorce. It can also address other financial issues, such as alimony.
- Postnuptial Agreement: Similar to a prenuptial agreement, a postnuptial agreement is drafted after the couple is already married. It serves the same purpose–protecting specific assets, such as an LLC, from division in a divorce.
By including specific provisions that outline how your LLC interests will be treated in the event of a divorce, you can help ensure that your business remains protected. For example, you can clearly state that your LLC interests are to be considered separate property.
Separate vs. Marital Property
Only marital property is subject to division in a divorce. Separate property, however, remains with the spouse who originally owned it.
- Marital Property: This typically includes assets acquired during the marriage. In some cases, if your spouse has made significant contributions to the LLC, such as financial investments or other contributions that increased its value, your LLC interest might be partially deemed marital property.
- Separate Property: This includes assets acquired prior to marriage or assets that were gifted or inherited by one spouse. If your LLC was formed before the marriage, it may be classified as separate property. However, if your spouse’s efforts directly contributed to the growth of the business during the marriage, part of the LLC might still be subject to division.
To minimize the chances of your LLC being classified as marital property, including specific language in a prenuptial or postnuptial agreement that clearly states your LLC interests are separate property is helpful.
Create a Well-Drafted Operating Agreement
Another way to protect your LLC is to create a well-drafted operating agreement. This document outlines the rules and regulations governing the LLC, including how ownership interests are handled.
- Third-Party Member Restrictions: In many LLC operating agreements, some clauses limit the transfer of membership interests to third parties without majority approval from existing members. If your former spouse is awarded a portion of your LLC interests, they will likely be considered a third-party member.
- Limited Control for Spouse: While having a former spouse receive part of your LLC interests may be inevitable, they still cannot run your business without approval. A third-party member is typically only entitled to financial distributions made by the LLC, not managerial control.
- Membership Consent Requirements: To add an extra layer of protection, you can specify that a larger amount of membership consent is needed to admit a new member to the LLC. This can help prevent your former spouse from becoming an active member with decision-making power.
Proactively drafting an operating agreement that includes these provisions can help protect your business from being negatively impacted by divorce proceedings.
Additional Tips for Protecting Your LLC
Consider these additional steps to further safeguard your LLC from divorce:
- Keep Detailed Records: Clearly document contributions to the LLC, especially those made before the marriage. This can help establish your LLC as a separate property.
- Avoid Commingling Assets: Do not use marital funds for LLC expenses or mix personal and business finances, as this can blur the line between separate and marital property.
- Pay Yourself a Fair Salary: Ensure you are fairly compensated for your LLC profits. Undercompensating yourself can potentially lead to claims that the business’s value should be included in marital assets.
Protecting Your Business Interests
Divorce is undoubtedly one of the most emotionally and financially challenging experiences a person can face. When your business is on the line, the stakes feel even higher. Protecting your LLC in the event of a divorce requires careful planning and strategic decision-making. The Orlando Family Team can help. Contact us today for a consultation and let our family help yours.
