Divorces Can Impact LLCs
In the United States, about 35% of small businesses are constituted as limited liability companies. Many of their owners are also married to each other. When the marriage ends, it can lead to complications for the LLC.
Limited Liability Companies and Divorce
LLCs are a popular business structure in the world of entrepreneurship. They offer a unique blend of features that combine the best aspects of partnerships, sole proprietorships and corporations.
LLCs provide their owners, known as members, with limited liability protection. With that, the members are not personally responsible for the company’s debts and lawsuits.
However, if the two members are married to each other, it can lead to plenty of complications in the event that they decide to divorce. These individuals will have to decide whether to sell, take over full ownership or work together for the sake of the LLC. There are pros and cons to all these outcomes. LLCs have two different structures: single-member and multi-member.
Whether it’s a single-member or multi-member entity, the structure of the LLC can influence the impact of a divorce on the business.
Single-Member LLC
In this structure, one spouse is the single owner of the company. The LLC is considered a distinct entity from the individual. As a result, the divorce usually keeps the LLC’s structure and operations the same.
However, even in single-member LLCs, the divorce proceedings may necessitate the valuation and disclosure of the business as an asset for property division. Sometimes, the LLC’s value could be considered when deciding how marital assets are distributed.
Multi-Member LLC
On the other hand, multi-member LLCs introduce more complications into the proceedings. In these cases, spouses parting ways must determine how to manage their ownership stakes in the LLC. The potential resolutions could involve:
Maintaining ownership of the business with one spouse
Opting to sell the LLC
Choosing to continue with joint ownership
Each of these choices carries its own set of issues. The decisions made regarding the business can affect everyone involved in the operations and the business entity, itself.
Operating Agreement Provisions
If you want to know how a divorce will affect an LLC, make sure to examine the operating agreement. This document provides guidelines and protocols that govern the management and operations of the business. It often will include specific clauses detailing the course of action in the event of a divorce, including how ownership interests are managed.
These provisions may include buy-sell agreements stipulating how ownership interests can be sold or transferred. They may also have restrictions on transferring membership interests, ensuring that control of the LLC remains within the desired group of members.
The existence and specifics of these provisions can influence the outcome of divorce-related decisions concerning the LLC.
Value of the LLC
Determining the accurate value of a business is another step during divorce proceedings. This valuation can affect the property division and potential financial settlements. You can use several methods to value an LLC.
Income-Based Methods
These approaches take into account the income and cash flow of the LLC to establish its worth. Popular methods will examine earnings capitalization and discounted cash flow analysis.
Asset-Based Methods
These methods concentrate on the value of the LLC’s tangible and intangible assets. Adjustments are made for liabilities to derive a net asset value.
Market-Based Methods
These strategies compare the LLC’s worth against similar recently sold businesses. The method depends on market data to establish the value of the LLC.
Each method has its advantages. Divorce attorneys often use a blend of ways to reach the appropriate valuation.
How to Handle the LLC
There are several options for your LLC, such as:
Retaining Ownership
Sometimes, one spouse may choose to retain full ownership of the business. This decision could be based on various factors, including interest in continuing the business, the financial means to buy out the other spouse’s interest or a desire to minimize disruptions to the company’s operations.
If one spouse decides to retain ownership, it involves buying out the other spouse’s membership interest. The purchase price is determined based on the LLC’s valuation. The divorcing spouses must negotiate the buyout terms, including payment schedules and associated tax implications.
Selling the LLC
Other times, the divorcing spouses may decide to sell the LLC. This decision might be driven by a desire to liquidate assets and divide the proceeds. Sometimes, neither spouse wishes to continue involvement in the business.
Selling an LLC involves:
Finding a buyer
Negotiating the sale terms
Completing the transaction
The sale price is based on the LLC’s valuation. The proceeds from the sale are then divided between the divorcing spouses according to their ownership interests.
Continuing Joint Ownership
In some situations, divorcing spouses may choose to continue joint ownership of the LLC even after the dissolution of their marriage. With this decision, there needs to be an agreement establishing clear guidelines for managing the business, voting rights and dispute-resolution mechanisms.
While continuing joint ownership can be a practical solution, it also requires a high degree of cooperation and communication between the divorcing spouses. Operating the LLC requires a commitment to shared responsibilities and decision-making.
You may want to reach out to a New Jersey divorce lawyer to learn more about your options.
Tax Consequences of an LLC Transfer
Transferring ownership interests in an LLC as part of a divorce settlement can have tax consequences that both divorcing spouses should consider. The Internal Revenue Service has specific rules and regulations about transferring business interests. These rules can vary based on the structure of the LLC and the type of transfer involved.
Transferring ownership interests may trigger capital gains tax, gift tax or other tax liabilities. Any couple deciding to transfer business ownership may want to consult a tax professional. These professionals can help divorcing spouses navigate these tax implications and develop strategies to minimize tax burdens.
Protect Your LLC Before a Divorce
When protecting a limited liability company from divorce, you can take various preventive measures. These include:
Prenuptial Agreements
These are contracts signed before marriage that outline how assets, including business interests, will be divided in the event of a divorce. They can specify that the LLC is separate property, not subject to division.
Postnuptial Agreements
As opposed to prenuptial agreements, these are contracts signed after the couple is married, but they often contain similar types of provisions. They can also be used to protect business assets in a divorce.
Buy-Sell Agreements
This legally binding contract outlines what happens if a co-owner leaves the business, whether by choice, death or divorce. It can limit the ability of a divorced spouse to acquire ownership.
Insurance Policies
A spouse can take out an insurance policy on their share of the business. The policy payout can be used in a divorce to buy out the other spouse’s share.
Trusts
Placing the LLC in a domestic asset protection trust can protect it from being divided in a divorce. However, this requires careful planning and legal advice.
Find a Divorce Lawyer in New Jersey
If you have reached the end of your marriage, you may want to know what to do with your LLC. The legal team at the Law Offices of Kelly Berton Rocco may be able to help answer those questions. You can call our office in Hackensack at (201) 343-0078 or visit our website to schedule a consultation.
