Key Takeaways:
- Virginia is an equitable distribution state, which can affect how an LLC is treated in a divorce.
- LLCs owned before marriage may remain separate property, become marital property, or have mixed characteristics depending on factors like how LLC funds were commingled, whether marital money was used to support the LLC, and membership changes made during the marriage.
- Valuing an LLC is complex and requires the help of an experienced attorney.
Divorce is already an emotionally taxing experience, but when a limited liability company (LLC) is involved, it adds layers of complexity and financial uncertainty. Without proper legal guidance, you risk losing control of your business or its value being unfairly divided, further complicating an already tricky situation. Our attorneys can help protect your interests, navigate the legal process, and work toward an outcome that safeguards your personal and business future.
What is an LLC, and Why Are They Tricky During a Divorce?
An LLC is a business structure that helps protect your assets from lawsuits against the business. It provides the same protections as a corporation but without the corporate structure. You can have a single-member LLC, have members who perform the same functions as a board for a corporation, or even create an LLC partnership. You will need to name a registered agent and create an operating agreement. An LLC is a pass-through entity, so the owner is not double-taxed like they would be with a corporation. You need an experienced attorney to help set up an LLC properly.
How is an LLC Treated in a Divorce?
If you own an LLC before your marriage and include it in a prenuptial agreement (or a postnuptial agreement), it will remain separate property. However, if you do not include the LLC in a prenuptial or postnuptial agreement, the LLC can still be considered separate property; however, any profits generated during the marriage will be classified as marital property. If you commingle funds to benefit the LLC, it becomes marital property. This is a complex situation that requires the help of an attorney during a divorce.
How is the Value of an LLC Determined?
Determining an LLC’s value is often complex and may require an experienced divorce attorney or even a forensic accountant. Typically, an LLC’s value includes the market value of its assets minus liabilities. For an operating business like a law firm, additional factors such as customer base, goodwill, and projected future earnings must be considered. Professional valuation is strongly recommended to determine fair market value accurately.
What Happens if Both Spouses Are Involved in the LLC?
If both spouses own the LLC, the Internal Revenue Service (IRS) allows it to be considered a qualified joint venture rather than a partnership if it meets certain criteria. They each claim their portion of the LLC, usually 50 percent, on their taxes, so both benefit from showing an income for Social Security purposes. In this case, the LLC is marital property and needs to be divided accordingly.
If one spouse is employed by the LLC owned by the other, standard employment taxes must be paid as though the employee spouse is a third-party employee. This arrangement can complicate the equitable distribution of LLC assets and may require detailed legal and financial analysis during divorce proceedings.
In either scenario, one spouse can buy the other’s interest if both parties agree.
How Can I Protect My LLC Ownership from Divorce?
You can protect your ownership in an LLC by taking several steps, including:
- Creating an operating agreement that dictates what happens to your ownership interest in the event of death or divorce
- Creating a prenuptial agreement (and, to some extent, a postnuptial agreement)
- Documenting the LLC properly
Planning ahead is important even if divorce seems unlikely. Without proper preparation, your business interests and financial stability may be unnecessarily jeopardized.
Can Prenuptial or Postnuptial Agreements Protect an LLC?
Yes, if an LLC is named in a prenuptial or postnuptial agreement and is worded correctly, it can protect your LLC.
What Are the Tax Implications of Dividing an LLC?
Dividing an LLC during a divorce may trigger tax consequences, including capital gains tax obligations, changes in taxable income due to shifting ownership shares, or adjustments in your tax bracket. Professional guidance can help minimize unnecessary tax burdens.
Determining Marital Property of an LLC
Virginia is an equitable distribution state, meaning property is divided fairly rather than equally. The court considers several factors when dividing marital property, including:
- The income of each party
- The future earning capacity of each party
- The non-marital assets each party has, if any
- The duration of the marriage
- The contributions of each spouse to the marriage
- The education of each spouse
- Whether one spouse provided while the other furthered their education
- Whether a spouse gave up a career to further the career of the other
Do I Need an Attorney if My Divorce Involves an LLC?
Because a divorce involving an LLC is complicated, we recommend that you use an experienced divorce attorney.
Why Clients Choose Virginia Beach Law Group
Virginia Beach Law Group’s experienced family law attorneys can guide you through a divorce, whether contested or uncontested, and protect your rights in major issues such as child custody, support matters, and property distribution.
Testimonials
“This team is amazing! We were delayed in closing due to a last minute discrepancy. Within 24 hours of being cleared up, Kimberley had us set up and ready to close! They were both outstanding and a real pleasure to work with! We cannot thank them enough for their quick execution and helping us through the process!” — B.M.
“I’ve worked with David Johnson on a personal case and have sent clients his way for years. He does amazing work and is a true professional. He is my go-to for all things estate planning related.” — N.K.
“Mr. Johnson is an amazing lawyer. He has a great personality, professional ethics, honesty, and integrity. He is extremely upfront and helpful with his advice which steers his clients for the high road. He showed that he had our best interest in mind, especially once we were in the courtroom. Mr. Johnson not only went above and beyond, but took the extra time to get the situation resolved. If anyone is looking for an amazing attorney who cares about your best interest, choose him! We couldn’t thank him enough for what he’s done!!” — T.R.
Related Resources
- Virginia Wills and Estate Planning Q&A: After a divorce, you must remember to update your estate plan.
- Identifying Personal Representatives When There is No Will: When you own an LLC or other significant assets, an estate plan can protect them and help assist in passing them down to your loved ones.
Protect Your LLC During Divorce
If you are planning on divorcing or have been served with divorce papers and have an LLC, contact Virginia Beach Law Group at 757-486-4529 for a consultation. You can also complete our online contact form to schedule a consultation.
Frequently Asked Questions
It depends on whether you commingled funds from the LLC. Generally, the LLC remains yours if it was yours before the marriage. However, any money the LLC earns during the marriage is typically marital. However, adding your spouse as a member may entitle them to a portion of your LLC.
Virginia is an equitable distribution state, so marital property is divided fairly but not necessarily equally. While division may start at approximately 50/50, the court adjusts distributions based on specific marital factors, contributions, and fairness considerations. The court has guidelines it must follow in determining a fair and reasonable distribution of property. Methods for dividing property outside of the court include buying out a spouse’s interest, selling the business and splitting the profits, or continuing co-ownership with agreed-upon terms.
Not necessarily. Equitable distribution does not always mean a 50/50 split. How an LLC is divided depends on factors such as each spouse’s financial and non-financial contributions, whether the LLC is considered marital or separate property, and the specific circumstances of the case.
A well-drafted operating agreement defines ownership rights and responsibilities and can potentially limit your spouse’s claims during divorce proceedings.
Yes, you can sell your portion of the LLC to your spouse during divorce proceedings. The sale can simplify asset division and provide a clear resolution regarding ownership interests.
Profits generated by the LLC during divorce proceedings are typically considered marital income and may be subject to division, depending on how the court views the ownership interests.
