The effect of a Divorce on your Limited Liability Company (LLC)

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Divorce Lawyer in Spring TX: If you or your spouse own a business or own a portion of a business it is possible that that business is classified as a Limited Liability Company (LLC). As opposed to operating a business as a sole proprietorship or partnership, an LLC protects the owners of a business from liability and allows the members to be in control of the business itself. There are also tax benefits associated with this classification.

Suppose then that you and your spouse are moving towards a divorce. There would be a need to determine how the LLC is going to be handled as a consequence of the divorce. The relevant questions to ask yourself will be discussed in today’s blog post as well as an overview of the types of LLCs that exist.

WHAT TO ASK YOURSELF IF YOU OR YOUR SPOUSE OWN AN INTEREST IN AN LLC

As with any financial asset in your life you will want to figure out the value of the LLC. There are people who appraise businesses for a living that can be hired to do this or you can always submit your own estimate to your spouse and their attorney and see if it is accepted.

Depending upon how the LLC was started (with what sort of money) and when it was started the LLC may be considered community property and would be subject to division in the divorce.

Another less thought of consideration that I think is crucial to take at the outset of a divorce is whether or not you or your spouse’s interest in the LLC, whether it is 1% or 100%, can be transferred to another person. Sometimes in the formation of the LLC there are restrictions placed on transferring your interest. A divorce decree cannot override any prior agreements.

WHAT ARE THE DIFFERENT TYPES OF LLCS?

Spring TX Divorce Lawyer: If you or your spouse are the general partner in a limited partnership then you may have also placed your general partnership within the confines of an LLC in order to protect yourself from liability. The reason for this is that not only would you be the person who manages the operation of the limited partnership, but you would also be the party who is personally liable for whatever obligations that the partnership takes on.

In doing so, the LLC can take on a limited percentage of ownership in the company but will take on all of the liability. The benefit of being the general partner within an LLC is being able to have a say and direct the day to day dealings of the limited partnership.

The limited partner has no liability beyond what he or she contributed to the formation of the partnership, but that party has no control over the day to day operation of the company. Depending on whether or not you and your spouse share in the partnership the value of each portion will need to be analyzed prior to final mediation or trial.

An operating business is another type of LLC that is commonly seen. These businesses are more often than not made up of only one or a few members.

If you are the spouse that is a member of this type of LLC you owe a fiduciary duty to the community estate which means that you must put the interests of your community estate (the estate of which you and your spouse both share in) before your own interests in conducting business related to the LLC.

The benefit of having only one owner is that it is easier to divide the ownership interest in a divorce case between you and your spouse. There is merit to the discussion of what is more advantageous for both parties: dividing the LLC up between each of you or allowing one spouse to retain their ownership in the LLC and then providing the other with assets or property that are equal to the ownership interest in the LLC.

Maybe the most well-known sort of business that can operate as an LLC, and one that is especially appropriate to discuss in the context of a family law case, is a family business.

When created, family businesses often place restrictions on who can become a member. This is done in order to make sure that only family members can actually join in the family business. Divorce is an easy way for an interest in the business to be divided up all sorts of different ways where the “purity” of ownership can get muddied. LLCs can restrict membership and keep the “bloodlines” pure in the LLC.

HOW IS AN LLC FORMED?

Spring Divorce Lawyer: Now that we know a few of the different types of LLCs let’s discuss how one is actually formed. The origination document is known as an operating agreement. The terms by which the LLC is operated, the manner in which debts are paid or members get paid are laid out, as well as who can actually become a member of the LLC.

As we touched on earlier in these blog post restrictions on how an interest in the LLC can be transferred are gone over in the operating agreement. Usually, a transfer of an ownership interest is made to be fairly difficult in order so that membership in the LLC is controllable.

Now that we’ve discussed the basics of an LLC we can get into what can happen to an LLC in your divorce. Stay tuned for tomorrow’s blog post from the Law Office of Bryan Fagan that will discuss exactly that.

QUESTIONS ABOUT LLC DIVISION IN A TEXAS DIVORCE? CONTACT THE LAW OFFICE OF BRYAN FAGAN TO LEARN MORE

Houston Divorce Lawyer: If you are a member in an LLC or your spouse is it’s likely that you have questions regarding how this circumstance will impact your divorce… Continue Reading