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The Effect of a Divorce on an LLC, Part Two

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

If your spouse is a member of an LLC, it’s important to understand that, while you can receive a portion of that membership interest, you won’t have significant control or input into the LLC’s daily operations and decision-making. Today’s blog post from the Law Office of Bryan Fagan, PLLC, delves deeper into this topic.

An assignee of a membership interest in an LLC, under Texas law, doesn’t participate in managing the LLC or making decisions about expenditures, investments, or reserves. Even though your spouse may have enjoyed these rights as a member, they cannot transfer them to you in a divorce decree. However, you will receive any income or incur losses from the LLC. As a membership assignee, you also have the right to inspect the LLC’s records and financial statements to understand its performance.

View your membership assignment as a partnership

Suppose we view your membership assignment as similar to a partnership. In that case, 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 were 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 estimate of its worth. What could you do? After all, the forecast could be much lower than the stock’s fair market value. Would the terms of the partnership agreement bind you?

Since Texas is a community property state and the stock itself would count as community property, you could likely own the stock per the terms of the partnership agreement that issued the stock. You would then sell the store 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 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 pace. An LLC will typically distribute funds to its members every year to pay their share of the taxes associated with the business.

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

This puts you as an assignee of 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 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 for the spouse to protect themselves is to assert that the assets of the LLC are not covered under the LLC’s operating agreement and instead belong to them 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 your spouse’s belief 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 surprise anyone who has read through blog posts that we have written that most divorce cases agree in mediation or even before 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. A judge would develop their framework, and you and your spouse would have to find a way to live within that framework.

In a situation where one of you is a member 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 requires much 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, PLLC, today.

No divorce is easy, but the attorneys with the Law Office of Bryan Fagan, PLLC, 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 of working with our office and trusting 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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  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
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  4. What happens to your business in a Texas Divorce?
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  6. High Net Worth Divorce / High Asset Divorce
  7. Business Owners and Business Assets in a Texas Divorce
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  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, PLLC | Business Owner Divorce Lawyer

The Law Office of Bryan Fagan, PLLC, routinely handles matters that affect children and families. If you have questions regarding Business Owner Divorce Lawyer, it’s essential 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 the Law Office of Bryan Fagan, PLLC by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan, PLLC, 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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At the Law Office of Bryan Fagan, PLLC, the firm wants to get to know your case before they commit to work with you. They offer all potential clients a no-obligation, free consultation where you can discuss your case under the client-attorney privilege. This means that everything you say will be kept private and the firm will respectfully advise you at no charge. You can learn more about Texas divorce law and get a good idea of how you want to proceed with your case.

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