What Happens to an LLC In a Divorce?

Owning and operating a business is a significant investment of time, energy, and money. If you find yourself facing divorce proceedings as a business owner, it’s understandable that you want to protect the investment that you’ve made. 

One option often discussed is using LLC business structures to protect your business from being subject to equitable distribution. Structuring your business as a limited liability company (LLC) may shield you from personal liability in a business context, but it won’t circumvent New Jersey’s equitable distribution laws in a divorce. 

Whether you and your spouse are operating a business together or you’re the only member of the LLC, a divorce case can upend your entrepreneurship without sound legal advice.  

When does a business become marital property? 

In New Jersey, marital property (property gained throughout your marriage) must be divided equitably in a divorce case. Any assets or liabilities acquired during your marriage could be considered marital property—including your limited liability company (LLC). 

Deciding what happens to an LLC in a divorce is a highly nuanced process. A great deal of information is necessary to discern whether or not your LLC should be considered marital property or separate property. This is one reason it’s so important for business owners to seek legal advice from trustworthy divorce attorneys before opening a divorce case. 

There’s a high likelihood that your limited liability company (LLC) may be subject to equitable distribution if: 

• You and your spouse both have membership interests or ownership interests 
• The operating agreement lists both you and your spouse as business owners 
• The limited liability company (LLC) opened its doors during your marriage 
• You started the business before your marriage, but it experienced significant growth during your marriage
• The LLC acquired property, such as real estate, during your marriage

Depending on the circumstances, it might be possible for your business to be deemed separate property if: 

• Your LLC was explicitly defined as separate property in a prenuptial agreement 
• The business is part of a family inheritance
• The LLC was a non-spousal gift 
• You started the business either before the marriage or after filing for divorce  

These guidelines may serve as a starting place to begin discussing the division of assets with your attorney, but they’re not the only points to consider. Before determining what happens to an LLC in a divorce, the court, your attorney, and a business valuation expert will require some key details: 

• Is anyone besides the divorcing couple a member of the LLC? 
• Does the operating agreement cover this type of contingency? 
• Did both partners contribute equally to the growth of the business? 
• What is the business’s annual income? 
• How do the projected future earnings track? 
• What is the fair market value of similar businesses? 
• Are there tax issues and liabilities that must be addressed? 
• What type of LLC is the business? 
• What tax classification does the LLC fall under? 

Types of LLCs 

Not all LLCs are the same. There are several different types of LLCs that may be formed, each with its own conditions, benefits, and limitations. 

Single member LLC vs. multi-member LLC

As the name implies, a Single-Member LLC has only one owner, whereas a multi-member LLC has one or more members. Each member of the LLC may have a different level of investment and percentage of interest in the LLC. 

Member-managed LLC vs. manager-managed LLC

A member-managed LLC is run by the individual(s) with ownership interest in the company. In this scenario, the operations agreement should set out certain rights and responsibilities for the managing parties, which may differ from those of other members of the LLC.

When a limited liability company (LLC) is manager-managed, a separate individual without ownership interest oversees its operations. 

Holding LLC

You can think of a holding or “umbrella” LLC like a nesting doll. Other LLCs, known as subsidiaries, are “nested” under (or owned and protected) by the holding LLC. 

Domestic LLC 

A domestic LLC conducts business only in the state in which it was incorporated. 

Foreign LLC 

A foreign LLC maintains a physical presence and does business in another state. 

Your divorce lawyers can provide additional information on how each of these types of LLCs may be affected by your unique divorce case. If necessary, seek legal advice from a business attorney to clarify what type of LLC your business is. 

LLC tax classifications 

The way an LLC is taxed by the IRS affects what happens to an LLC in a divorce because it affects the court’s assessment of your personal income. 

“Pass-Through” 

Your limited liability company (LLC) may function as a “pass-through” organization, with each member of the LLC paying taxes based on their share of the profits. 

S-Corporation 

Alternatively, some business owners opt for the LLC to be taxed as an S-Corporation. Again, business income is also taxed on each member of the LLC’s personal tax returns. 

In either of the scenarios above, the court may view profits from the business as your personal income, leading to higher spousal or child support obligations. 

C-Corporation

If your LLC is taxed as a C-corporation, dividends paid to business owners from the corporation can be considered personal income. In other words, company profits may be considered as the judge determines the appropriate amount of spousal or child support. 

The effects of divorce on your LLC 

Depending on your operating agreement, it may be possible for your divorce lawyers to argue that the limited liability company (LLC) is separate property, so that you can retain your ownership interest in your business. However, this is not guaranteed.

In most cases, the state of New Jersey will view your business as a marital asset. Your spouse could retain membership interests or ownership interest in the LLC, depending on the division and value of your other marital property. 

It may be particularly challenging to manage a limited partnership after the divorce. In this situation, it may be more desirable to “buy out” your spouse from the business. You may also mutually agree to sell your LLC and divide the profits equitably.  

Fighting for your interest in the LLC 

At Dughi, Hewit & Domalewski, we recognize that operating your business through a divorce case can be a draining, stressful endeavor. What happens to an LLC in a divorce can impact your financial future for years to come. Our goal is to minimize the negative impacts of this process on your well-being and your business. 

Our law firm includes collaborative, compassionate attorneys who are knowledgeable in both family and business law. We combine the resources of a larger law firm with the time and personal attention of a smaller law firm to achieve the most equitable and favorable outcome possible for your family and your limited liability company (LLC). 

Whether you’re a member of the LLC in question or have an ownership interest, schedule your consultation today. Our discerning team of divorce lawyers is waiting to help you better understand your options and protect your business throughout your divorce case.