How Is a Family Business Like an LLC Treated in a Divorce in North Carolina?
Business Owners and Divorce
Getting divorced is usually challenging and stressful, even if the separation is an amicable one. And it becomes even more complicated for business owners.
If you own a limited liability company (LLC), you are probably wondering how those business assets are treated during your divorce proceedings.
Between understanding what property is subject to division and protecting your assets, there are numerous legal issues to consider when spouses separate in North Carolina. Fortunately, there are measures business owners can take to protect their business in the event of a divorce.
Keep reading to learn more about your options.
What is a Limited Liability Company (LLC)?
An LLC is a type of business designation used to protect your business and give you more control. For a family business, multiple people may be owners, or “members.” The portion each person owns is their membership interest. This ownership interest counts as personal property in the event of a divorce, unless some measures are taken to protect it as non-marital property.
A single-member LLC is a popular way to file a business. However, personal and business assets can seem like a gray area, since an owner is personally responsible for the business’s taxes and debts.
Families can create LLCs to ensure the family business is easily passed down to the next generation. A Family Limited Partnership offers protections for generational wealth, including a method to shield inheritances from taxes.
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SCHEDULE YOUR CONSULTATIONHow Is an LLC Treated in a Divorce?
The answer depends on when the LLC was formed, whether there are divorce protections in the LLC operating agreement, and each spouse’s interest in the company.
If your spouse has any membership interest, or even if they contributed to the LLC in any way, the interest in the LLC can be deemed marital property and therefore be subject to North Carolina’s equitable distribution state laws. This means the property, or the business interests, must be divided fairly between the spouses.
A fair division might depend on how much membership interest each spouse has. Some businesses are not easily divided. The divorce court may see fit for one spouse to buy out the other spouse’s ownership interest. In other cases, it may be possible to negotiate for one spouse to keep the LLC marital property in exchange for another valuable asset, like the house.
RELATED: Navigating a High-Asset Divorce in North Carolina: What You Need to Know
Protect Your Business in Advance
The best way to protect your business is to take proactive measures before you get married. No one expects to get divorced when they commit to marriage, but small business owners should consider taking steps to protect their LLCs before they become marital assets.
- Build Your Business Ownership Strategically
As you launch your business, consider building in provisions that protect the company, such as in the LLC’s operating agreement. Creating an LLC (limited liability corporation) or C-corporation allows business owners to title real estate and property to the business. While your interest in the business may be marital property, creating a formal structure helps prevent individual assets owned by the business from being subject to division in the divorce settlement.
- Sign a Prenuptial Agreement
Creating a prenuptial agreement might seem cold at first glance. However, this binding contract is an effective way to protect property acquired prior to the marriage. This agreement, which gets signed before the wedding, outlines what happens to property, businesses, assets, and income if the couple separates or divorces. A prenuptial agreement is especially useful if both spouses are entitled to LLC ownership, together or separately.
RELATED: How Do Prenuptial and Postnuptial Agreements Affect Divorce?
It's Not Too Late to Protect Your Business
If you’re a small business owner in North Carolina, you can still protect your business even if it is currently considered marital property.
- Understand Separate vs. Marital Property
As estates are separated, it’s important to understand what property is considered individually held and what is shared. Any property that was acquired or grown during the marriage—including a business—is generally considered a marital asset even though it is only in the name of one party. Other marital assets include retirement account contributions made during the marriage, savings accounts, or the family car and home. All marital assets and debts are subject to division. North Carolina is an equitable distribution state, which means that divorce courts start with a 50/50 marital property division. However, you can still make arguments during negotiations and in court for an unequal division.
Separate property includes property owned prior to the marriage, one spouse’s inheritance received during the marriage, a business started before the marriage, or a business interest that is protected by an operating agreement ahead of time.
- Create a Postnup
If you need to protect your small business but you didn’t implement protective legal measures before getting married, a postnuptial agreement is a good option. Like a prenup, a postnup is a signed agreement between spouses, but this type of agreement is signed after the marriage. A postnuptial agreement is a notarized document that can designate assets as separate property or outline how they are divided in the event of a divorce, including LLC membership interest. Creating a postnup with the help of an experienced divorce attorney is a good option for those interested in protecting their business after they’re married.
If the Divorce Process Has Already Begun
If you are already in the divorce process and have a small business like an LLC that is subject to division, you must have a value to assign to the business.
- Obtain a Valuation for the Business
A business valuation determines the value of the business for property division purposes. As estates are divided during a divorce, knowing the value of the business (if they are considered marital property) is a critical factor for the division process. Businesses can be evaluated based on the value of tangible (savings, inventory, or equipment) and intangible assets (client relationships). The sum of any liabilities (loans, payroll, or anything else the business may owe) are subtracted from the value of the assets to determine the total value. The divorce court must receive a business valuation to include the business in the division of marital assets. Contacting a family law attorney who has experience working with small business owners minimizes the time, risk, and stress involved in the settlement agreement. They’ll know how to handle other members, co-owners, or your spouse’s contribution with the help of financial experts.
Hire a Lawyer—Whether You've Prepared or Not
Divorce can be emotional and messy. Having an experienced attorney on your side who understands the complexity of running a small business can make a difficult situation less challenging. A good lawyer can guide you through the valuation process, creating a postnuptial agreement, and property division, among other complicated aspects of your divorce case.
If you’re an LLC business owner in Mecklenburg County facing a divorce, Myers Law Firm is here to support you. We’re experienced, compassionate divorce lawyers with a proven track record, ready to advocate on your behalf. To schedule your initial consultation with one of our attorneys, please call our Charlotte office at 1-888-376-ATTY (2889) or contact us using our online contact form.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.
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