The divorce process can bring up difficult questions about how to divide the assets you’ve accumulated during your marriage. For couples with high net worth, this process becomes even more complex and potentially contentious. Preserving wealth in a high-asset divorce is particularly challenging, especially when significant business interests are involved. In this article, we’ll explore the intersection of divorce and business ownership, including:
- What happens to LLCs in a divorce?
- Who receives the financial rights to the assets of a business in divorce?
- How do you split a business in divorce?
- How can you protect your business from divorce?
Business Owners and Divorce: What can go wrong?
When one or both spouses have ownership or significant stakes in a family business, it adds extra wrinkles to the divorce mediation and litigation process that can impact both your financial health and the health of your business as a whole.
During the divorce process, for example, you and your spouse might find yourself in dispute over the most accurate ways to determine the value of your business or who should retain control of the business post-divorce, or about the division of business debts and liabilities.
As a result of these sorts of contentious, time-consuming, and emotionally draining issues, your business’s overall performance can suffer. Important business decisions can end up deadlocked by a prolonged dispute—leading to the business losing its value or taking a hit to its reputation. If family business ownership becomes contested, the court might even order a sale or liquidation of business assets.
Any of these issues can have a serious deleterious effect on your family’s succession plans or your personal wealth preservation goals as you approach the prospect of a post-divorce life. How you and your spouse answer the thorny questions of divorce and business ownership can dramatically impact both of your separate financial futures.
So, what can you do to head off these issues and preserve your family business in a divorce? First, let’s take a closer look at how an LLC is treated in Tennessee divorce court.
How is an LLC treated in a divorce?
In Tennessee, an LLC can either be classified as marital property subject to division or separate property. If your and your spouse’s business was established as an LLC during your marriage, it is considered shared marital property, even if it isn’t under your spouse’s name. Marital property is subject to equitable division in Tennessee, which means the LLC’s value will be divided fairly and equitably—not necessarily equally—based on factors such as each spouse’s contribution to the business, the length of the marriage, and the economic circumstances of each spouse.
But what if the family business was incorporated prior to your marriage? If your family business or your spouse’s business existed before you got married, it is considered separate property, belonging solely to the spouse it belonged to prior to marriage.
If that sounds too simple, rest assured, it becomes more complicated—while the LLC may be considered separate property, if the value of the company increased during the marriage (and you would like to hope that it did), that increase in value is considered marital property.
Once your family business is classified as marital or separate property and the court has received a fair market valuation of the LLC, it is subject to division.
How to Split a Business in Divorce
Dividing business assets does not necessarily mean splitting a business down the middle and giving one half to each spouse, like in the biblical story of King Solomon. Rather, there are multiple avenues to approach distributing an LLC’s value fairly between spouses during divorce:
Buyouts
In an LLC, all of the members of the company have financial rights to the assets of a business, including profits and losses, in proportion to their ownership interests as specified by the business’s operating agreement. To keep your family business fully in the family, you may buy out your spouse’s ownership interest in the LLC, either through a lump sum or structured payments.
This is a common method of splitting a business in divorce if you were significantly more involved in the business than your spouse. It compensates them for the value they created while keeping your family business wholly on your side of the family. In some cases, the court might also award your spouse a portion of future profits, distributions, or income generated by the LLC.
Offsetting Assets
One other agreement you and your spouse might come to could be for you to retain business ownership in full, in exchange for giving up other marital assets of equivalent value. For example, you might agree to keep the family business in full, in exchange for giving your spouse the entirety of a shared real estate property or retirement account.
Co-Ownership
One rare option to reconcile divorce and business ownership is to decide on co-ownership. Both spouses continue to jointly own your LLC. This option is not commonly seen, as it can lead to conflict or operational challenges if there is a lot of contention between you and your spouse. However, if your divorce is amicable, it could work out.
How to Protect Your Business from Divorce
Untangling your family business from an ending marriage can be difficult. In a particularly challenging or contentious divorce process, your business’s value or reputation can suffer, disrupting your plans to use it to build and preserve wealth for yourself and your family. However, there are multiple strategies you can pursue before or during marriage to safeguard your family business in the event of divorce:
Prenuptial and Postnuptial Agreements
You can use a prenuptial or postnuptial agreement to answer many questions about the division of financial assets in the event of divorce before you or your spouse even start considering the possibility. For example, a prenuptial agreement signed ahead of your marriage or a postnuptial agreement signed afterward can specify that your business remains separate property not subject to division, rather than becoming a marital asset. Postnuptial agreements can also detail terms for buyouts or offsetting assets.
Trusts
To prevent your family business from being included in marital assets during a divorce, you can place your business in an irrevocable trust, which owns the business in your and your family member’s steads. As a result, you can shield the business from marital asset division in divorce.
You might also set up a Family Limited Partnership or Family Limited Liability Company, which allows your family to maintain control over and financial rights to the assets of a business while limiting the ability of non-family members (such as a divorcing spouse) to claim ownership or control.
Divorce Clauses
When you start an LLC, you have significant leverage in drafting its operating agreement to determine how to split a business in divorce—or to avoid splitting the business altogether. Your LLC’s operating agreement can include buyout clauses, restrictions on transferring ownership interests, or predetermined valuation methods to avoid disputes over the value of your marital assets.
Protect Your Business with MHPS
These are just a few examples of strategies to deal with the complicated issues that spring up between divorce and business ownership. Deciding how to split a business in divorce or protect your business from divorce requires careful consideration of your circumstances and your options.
The team at MHPS Law’s Nashville offices has experience helping high-asset couples with significant business assets approach both marriage and divorce with an eye for minimizing conflict over business ownership interests. Schedule a consultation with us today to find out what we can do to help you preserve your wealth and your business.
