If you own an LLC, a divorce may have a large impact on the business assets. Limited Liability Companies (LLCs) are common business structures that offer flexibility and protection for owners, but their treatment during a divorce can be complex. In this article, we explore how LLCs are handled during divorce proceedings, providing insights into what to expect and how to navigate this challenging part of the divorce process.
What is an LLC?
A Limited Liability Company (LLC) is a business structure that combines the flexibility of a partnership with the limited liability of a corporation. LLC owners, known as members, enjoy personal liability protection, meaning their personal assets are generally not at risk if the business incurs debt or legal issues. This protection, however, doesn’t necessarily extend to divorce situations.
Determining Marital Property
During a divorce, the division of assets is a central issue. In North Carolina, the property acquired during marriage is typically divided equally between both parties, regardless of whose name the asset is in. But when it comes to businesses and other significant assets, the process is not always straightforward. Here is a general guide for how an LLC is treated during a divorce to establish whether it is considered marital or separate property.
- Marital Property: If the LLC was formed during the marriage or if marital funds were used to establish or grow the business, it is likely considered marital property. In this case, both spouses have a claim to the business’s value.
- Separate Property: If the LLC was established before the marriage and has not used marital funds or assets for its operation or growth, it may be considered separate property. However, even if an LLC is separate property, any appreciation in its value during the marriage could be subject to division.
When you consult with an experienced divorce attorney, you’ll have the best guidance for protecting your business or helping you secure what you deserve during the division of marital property.
Valuing the LLC
Once it’s determined that the LLC is marital property, the next step is to value it. This valuation can be complex, as it involves assessing the business’s assets, liabilities, revenue, future earning potential, and other factors. Professionals like forensic accountants or business valuation experts are often brought in to provide an accurate assessment.
One common method used for valuing businesses in divorce cases is the income approach. Under this approach, the financial expert determines what the business is worth based on the present value of the income it is expected to generate in the future. A family law attorney will coordinate hiring the right expert for a fair and effective valuation of the LLC.
Division of the LLC
After the business valuation, the process of dividing the company between both spouses can begin. There are several possible outcomes for handling an LLC during a divorce, with these being some of the common outcomes.
Buyout
One spouse buys out the other spouse’s interest in the LLC. This is often the simplest solution, allowing the business to continue operating without disruption.
Joint Ownership
In some cases, ex-spouses may agree to continue co-owning the LLC. This arrangement requires a high level of cooperation and trust, which may not be feasible for all couples.
Sell the Business
If neither spouse wants to continue with the business, selling the LLC and dividing the proceeds is another option.
Protecting Your Interests
If you’re an LLC owner going through a divorce, there are steps you can take to protect your interests:
Operating Agreement: A well-drafted operating agreement can outline how ownership changes in the event of divorce, reducing ambiguity and conflict.
Prenuptial or Postnuptial Agreements: These agreements can specify how business assets are divided in the event of a divorce, providing clarity and reducing disputes. It’s important to know prenuptial agreements are signed prior to marriage, while postnuptial agreements provide security when a couple is already married.
Seek Legal and Financial Advice: Engage with divorce attorneys and financial experts who specialize in business asset division. They can help you navigate the complexities of divorce and ensure a fair outcome.
Need Help With Protecting Your Business During Divorce?
Dealing with an LLC during a divorce can be challenging, but with careful planning and experienced guidance, you can navigate the process successfully. If you’re going through divorce and need help protecting your business or safeguarding your rights, contact New Direction Family Law today. We serve clients in Raleigh, NC and surrounding counties with trusted representation through divorce. Call (919) 719-3470 or fill out our contact form to speak with an attorney.