The effect of a divorce on an LLC, Part Two

A subject that, in my opinion, that is becoming increasingly relevant is the status of a business after a divorce. Specifically, we have been discussing a Limited Liability Company (LLC) as a specific type of business formation.

If it is your spouse who is a member of an LLC then you would want to know that you can be assigned a portion of that membership interest but that you would not be able to have much control or even input into the day to day workings and decision making of the LLC. Let’s explore this topic more in detail as the subject of today’s blog post from the Law Office of Bryan Fagan.

The day to day responsibilities of managing an LLC in addition to deciding how the money will be spent, invested or kept in reserve is not something that an assignee of a membership interest is able to take part in under Texas law.

While your spouse may have had those sort of rights in his membership, they cannot be assigned to you in a divorce decree. You would be able to earn whatever income or loss comes out of the LLC, however. Likewise, you are able to inquire as to how the LLC is performing by inspecting their records and financial statements as a membership assignee.

View your membership assignment as a partnership

If we view your membership assignment as being similar to a partnership then we can make some progress on figuring out how to understand the rights you have after a divorce in the LLC.

Let’s take a hypothetical example to see if we can learn a little more on the subject of LLCs. Suppose that you as a husband did not work within the partnership but was awarded your wife’s shares of stock in the family partnership.

As mandated in the partnership agreement, the partnership took back the stock and offered to pay you their own estimate of what the stock was worth. What could you do? The estimate could be much lower than the fair market value of the stock, after all. Would you be bound by the terms of the partnership agreement?

Since Texas is a community property state and the stock itself would count as community property it is likely that you could own the stock per the terms of the partnership agreement that issued the stock. You would then be able to sell the stock but only as allowed by the partnership agreement.

Risks of owning an assigned interest in an LLC

An LLC is a “pass through” entity which means that income is not taxed at a corporate rate but only at your own individual level as a taxpayer. In this way you would not have to pay a “double tax”- once at the corporate rate and once at your own individual rate. An LLC will typically distribute funds to its members on a yearly basis in which they can pay their share of the taxes associated with the business.

A family business will often times reinvest money itself in order to pay for items down the road or save to make an investment. Distributions, as a result, are less common than in other LLCs.

This puts you as a the assignee of a membership in an LLC in a tricky position, in that you cannot have a say in this decision and you then must pay your tax burden without assistance from the LLC. This is obviously a risk for you to take on potentially and you would have to assert that the LLC did not distribute funds based on a reason other than legitimate business interests.

Another method to protect yourself as the spouse to assert that the assets of the LLC are not protected under the operation agreement of the LLC itself and instead belong to you as an individual. You could see this sort of issue arise if your spouse who owns a share of the LLC asserts that the LLC is their separate property. You would then, theoretically, be able to go against this belief of your spouse and get access to the share of the LLC that is in fact community property.

As we’ve stated before most divorce cases settle out of court

It should not come as a surprise to anyone who has read through blog posts that we have written that the majority of divorce cases settle in mediation or even prior to mediation.

This is due in no small part to the fact that you and your spouse, just as spouses before you, would be better able to hammer out an agreement that takes into consideration each side’s desires much better than a judge would. Obviously, a judge would come up with their own framework and you and your spouse would have to find a way to live within that framework.

In a situation where one of you are members of an LLC an “outside the box” agreement is more possible and would better suit you and your spouse. You may end up with only 80 percent of what you want in a settlement but your odds of doing better with a judge are lower than in a settlement situation. A subject like LLCs with difficult to understand terminology and factors require a great deal of thought and analysis. Leaving this up to a judge is not a risk that I would be overly excited to take.

Questions about your divorce? Contact the Law Office of Bryan Fagan today

No divorce is easy but the attorneys with the Law Office of Bryan Fagan work tirelessly on behalf of our clients to advocate and present options and solutions to their problems. We offer free of charge consultations six days a week where our attorneys can answer your questions in a comfortable environment.

Across southeast Texas, families like yours have seen the benefit or working with our office and trusting in our team. Contact us today to learn more about how we can help you manage your divorce and achieve whatever goals you have set out for yourself.

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Other Articles you may be interested on regarding Houston Court Local Rules:

  1. The effect of a divorce on your Limited Liability Company (LLC)
  2. Business owners should be aware of the following tips to prepare for a divorce in Texas
  3. High asset divorces and their affect on Golden Years Divorces
  4. What happens to your business in a Texas Divorce?
  5. How to handle a high net-worth divorce in Texas
  6. High Net Worth Divorce / High Asset Divorce
  7. Business Owners and Business Assets in a Texas Divorce
  8. Attacking the Enforceability of a Premarital Agreement in a Texas Divorce
  9. My Fiancé wants me to sign a Texas Prenup. What should I do?
  10. Dower Contracts and a Texas Divorce
  11. Can I sue my spouse's mistress in Texas?
  12. When is, Cheating Considered Adultery in a Texas Divorce?
  13. 6 things You Need to Know Before You File for Divorce in Texas
  14. Texas Divorce Morality Clause: Be Careful What You Ask For

Law Office of Bryan Fagan | Business Owner Divorce Lawyer

The Law Office of Bryan Fagan routinely handles matters that affect children and families. If you have questions regarding Business Owner Divorce Lawyer, it's important to speak with a Business Owner Divorce right away to protect your rights.

A Business Owner Divorce Lawyer is skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact Law Office of Bryan Fagan by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan handles Divorce cases in Spring, Texas, Cypress, Spring, Klein, Humble, Kingwood, Tomball, The Woodlands, Houston, the FM 1960 area, or surrounding areas, including Harris County, Montgomery County, Liberty County, Chambers County, Galveston County, Brazoria County, Fort Bend County and Waller County.

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