You have worked hard to establish your business, but now you intend to divorce.
Surprisingly, many people are unaware of how a Texas divorce will affect their business.
Some even assume that nothing will happen and that they can continue to operate as they normally have.
However, Texas law requires that couples divide their community property 50/50.
And, believe it or not, your LLC business might qualify as community property. Read on for key considerations about divorce and an LLC business, and remember to speak to an Austin divorce lawyer if you have questions.
Does Your LLC Business Qualify as Community Property in a Divorce?
Under Texas law, community property is all property you obtained or claimed after getting married. This includes things like wages and other earnings, as well as any business you started.
Separate property is property you obtained or claimed while single, or property that was gifted to you or left as part of an inheritance even when married.
Most LLCs are probably community property if you started the business after marriage. This means that your business is subject to community property division during a divorce.
Some exceptions exist. For example, you might have inherited the business, or you used an inheritance to solely fund your business. In these situations, you might be able to claim the business is your separate property, which you can leave with.
Many people think it is unfair to consider a business community property. After all, you might have started and built your business entirely on your own without any input from your spouse. Nevertheless, Texas community property law still applies.
Sometimes, a problem arises if you started the business before marriage but continued it while married. Your business likely grew, and it certainly generated income since you walked down the aisle.
Typically, income generated while married is community property, so if your LLC generated $50,000 a year, then your spouse has an equal right to share in that. Some of the value of the business might also qualify as community property if the business grew while you were married.
How Much is Your Business Worth?
Once you determine some or all of the business is community property, you need to assign a dollar value to it. When dividing community property, the judge puts all your community property into a pot. You can’t evenly divide the property in the pot until you know how much each piece is worth.
Valuing a business is difficult. For example, you might own the business with someone else (who isn’t your spouse). A valuation expert and an attorney will need to carefully analyze the size and value of your ownership interest.
There are also different ways to value a business:
- The amount the business would fetch on the open market
- The value of the LLC’s assets, including intangible assets like goodwill, minus any liabilities
- The amount of income generated by the business
Different valuation methods can result in different values for the business. It is possible that spouses will disagree over the valuation, with each retaining a different expert to justify the valuation method used.
How Do You Divide an LLC?
If all or part of the LLC is community property, then additional problems arise with dividing the business. There are a few approaches we have seen divorcing business owners use:
- You can take the entire business and your spouse gets an offsetting amount of other community property. For example, your business might be worth $150,000. Your retirement account might also be worth $150,000. In this example, you can leave with the business and your spouse will get the retirement account.
- You take the entire business and buy out your spouse. There might not be enough community property to offset your spouse’s portion of the LLC. In this situation, you might need to take out a loan, or your spouse will get a judgment against you for the value.
- You can sell the business and divide the proceeds. This is a fairly easy option, though it won’t work if one of you wants to continue ownership.
- You can continue as joint owners of the LLC. This is another option that is far from ideal. Since you no longer want to be married to your spouse, it is unlikely you want to run a business together.
Nevertheless, this option can work if the divorce is amicable and both spouses remain committed to the business. One spouse might merely get a right to profits from the LLC but not have any control over the business.
You should give careful consideration to your choice. You also need to pay close attention to the LLC operating agreement. It might limit who can transfer ownership interest and when.
What Documents will You Need?
Your attorney will need to see certain documents to help you analyze your options regarding the LLC in a divorce. For example, your attorney will need to see:
- The LLC’s tax returns
- LLC agreement
Obtaining this information is complicated, especially if you or your spouse is simply one owner among many. For example, you might need to agree to a confidentiality order in order to obtain the required documents.
This order can protect the other owners of the LLC from having their internal documents divulged to competitors in the market. With this information, you have a better chance of reaching an agreement regarding the LLC that will work for everyone involved.
Your attorney will also need to analyze whether a spouse who receives a share of the LLC can become a member of the LLC. If not, he or she will probably only be an assignee with rights to payment.
Concerned about the Effect of Divorce on Your LLC? Contact Our Office
Divorcing with a business requires more careful consideration of community property division than in other divorces. Protect your business and your financial future by meeting with an attorney who understands the unique challenges posed by divorcing with an LLC.
Contact the Law Office of Ben Carrasco today. Our law firm has handled many divorces, and we are prepared to protect your rights to your business. Contact us today by calling 512-320-9126 or sending us an online message.