How Is an LLC Treated in a Texas Divorce?

Ensuring your long-term security in a divorce is a challenging process. Those challenges become even more significant when one of the marital assets is a limited liability company (LLC). If you want to know how to protect an LLC from divorce, it’s critical to understand how LLCs are valued, what interests both spouses may be entitled to, and how an LLC’s value might be divided during the proceedings.

Member LLCs vs. Multi-Member LLCs

In Texas, LLCs are classified in one of two ways: single-member or multi-member. 

• Single-Member LLC: A limited liability company with only one owner designed to protect the owner’s personal assets from the business’s debts and liabilities.
• Multi-Member LLC: A limited liability company with two or more owners that offers legal protection from the business’s debts and liabilities to all members.

Some of the legal considerations for a single-member LLC in a divorce are different from those of a multi-member LLC. A single-member LLC in Texas may face greater operational challenges in a divorce, as the business is closely tied to one spouse. Meanwhile, with multi-member LLCs, operating agreements may bar a spouse from acquiring a stake in the company if they’re not already a member. 

Valuing an LLC During Divorce

Valuing an LLC in a divorce presents many challenges, but it is also one of the most crucial actions when it comes to protecting your interests. Dividing assets fairly requires an intimate understanding of the business’s worth based on its market value, the value of its assets, and both its current and potential future income. 

Determining the value of your LLC is typically done in one of three ways:

• Income Approach: Analyzing past and projected earnings and adjusting for risks and expenses to estimate future cash flows.
• Market Approach: Looking at similar businesses that have recently sold to determine the current market value of the LLC.
• Asset-Based Approach: Determining fair market value for the business’s assets while subtracting liabilities. 

Valuing an LLC in a divorce is generally done by either a court-appointed valuation expert or through both spouses’ attorneys, who will work with experts to arrive at their own valuations.

Dividing LLC Interest in Divorce

Once the LLC’s value is determined, the next step is to determine how it will be divided between the divorcing spouses. 

According to Texas Family Code Chapter 7,  the courts will consider the circumstances of the case to divide the LLC “in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.” 

Ways LLC Interest Might Be Divided

Determining how to divide an LLC can be complex, and it can involve a number of different approaches, including:

• Buyout: One spouse may facilitate a transfer of LLC interest in a divorce by buying out the other spouse’s share in the company, typically through a lump-sum payment or a structured settlement.
• Offsetting Assets: One spouse is awarded sole ownership of the LLC by offsetting its value with other assets. For instance, the spouse who relinquishes their interest in the LLC will receive a greater share of the investment accounts or real estate.
• Selling the Business: If neither spouse can afford to buy out the other, or if both parties are heavily involved in the business’s operations, sometimes the best option is to sell the business and split the proceeds. 
• Co-Ownership: When the business relies heavily on both parties or if the divorce is amicable, sometimes the divorcing spouses choose to continue co-owning the business.  

When Does a Spouse Have Rights to an LLC in Divorce? 

There are instances where only one spouse has legal rights to their LLC in a divorce. Texas is a community property jurisdiction, which means almost all property acquired during a marriage is owned equally by both spouses. Only an LLC owned before the marriage or acquired as a gift or by inheritance is considered separate property. Separate property is not divided between spouses in a divorce.

However, when an LLC considered separate property appreciates in value over the course of the marriage with the help of marital funds or the other spouse’s labor, that appreciation may be subject to division. 

Protecting Your LLC Before and During Divorce

You can take proactive measures that can help protect your LLC during a divorce. Some of those measures include: 

• Creating Prenuptial and Postnuptial Agreements: These agreements can designate your LLC as separate property or determine how its value will be divided in a divorce. 
• Keeping Business and Personal Finances Separate: Combining your finances can make determining ownership of your LLC complicated. Use a separate business account, maintain meticulous accounting records, don’t use business funds for personal activities, and pay yourself a reasonable salary. 
• Documenting Ownership and Contributions: Proving sole ownership can require ample evidence. Keep all documentation of your LLC’s formation, tax filings, prior valuation reports, financial statements, and capital contribution records.
• Creating an Operating Agreement: For multi-member LLCs, an operating agreement can establish a valuation method, require member approval for ownership transfer, and restrict ownership transfer. 

Moving Forward: Ensuring Business Continuity

Protecting your business during and after your divorce can require some important changes. Be sure to:

• Update Your Operating Agreement: If ownership structure changes, updating your LLC’s operating agreement to reflect that is critical. Updates often include revisions to member ownership percentages, buy-sell provisions, voting rights, management authority, and succession planning.
• Communicate with Stakeholders: Ownership disputes can damage stakeholder confidence in your business’s future. Transparent communication about current business operations, the state of ownership, and the path forward is crucial.
• Adapt for Financial Stability: Divorce can completely alter your finances. Adjust accordingly by reassessing your operating budget, reviewing your debt obligations, and updating your cash flow projections. 
• Update License and Contracts: A change in ownership can cause a number of disputes and compliance issues if you fail to make the necessary administrative updates. Ensure all licenses, permits, contracts, and insurance policies reflect these changes.

Contact High Asset Divorce Attorneys at Balekian Hayes Today

If you’re seeking a divorce and you’re a member or sole owner of an LLC, you need a high-net-worth divorce attorney with the knowledge and experience to safeguard your business interests. Balekian Hayes, PLLC, will help you develop a plan to help you achieve the long-term stability and fair settlement you’re looking for. Contact us to schedule a consultation today.