How Is an LLC Treated in a Divorce?
LLCs, or limited liability companies, are a popular business structure due to their flexibility and protection of personal assets. But what happens to an LLC in the event of a divorce?
For entrepreneurs and business owners, understanding how an LLC is treated in a divorce is crucial to safeguarding their financial future. This article aims to clarify the legal landscape surrounding LLCs in marital dissolution by going in depth into the following topics:
- Introduction to LLCs and Divorce in Milwaukee
- What Constitutes Marital vs. Separate Property in Wisconsin
- The Legal Framework for LLCs During Divorce in Milwaukee
- Valuing an LLC for Equitable Division
- Protecting Your LLC Prior to Marriage
- Options for Dividing an LLC During Divorce
- Seeking Legal Advice
1. Introduction to LLCs and Divorce in Milwaukee
In Milwaukee, as in the rest of Wisconsin, navigating a divorce involving a Limited Liability Company (LLC) adds a layer of complexity to the proceedings. An LLC is not just a business entity; for many, it represents years of hard work, dedication, and dreams. When it comes to divorce, the treatment of an LLC can significantly impact both parties involved.
However, when entangled in a divorce, the clear lines that usually define an LLC’s assets, liabilities, and ownership can become blurred. Understanding how such entities are approached legally in Milwaukee’s divorce courts will lay the groundwork for navigating these turbulent waters, ensuring you’re better prepared for the decisions and negotiations that lie ahead.
2. What Constitutes Marital vs. Separate Property in Wisconsin
In Wisconsin, the distinction between marital and separate property is a fundamental aspect of divorce proceedings, especially when it involves complex assets like LLCs. The state adheres to the principles of community property, meaning that all assets acquired during the marriage are considered joint property and subject to division upon divorce. However, separate property—assets owned prior to the marriage or acquired through inheritance or gifts to one spouse—is generally not divided.
But what happens when an LLC, started before marriage, grows significantly during the union? Or when both spouses have invested time, money, or expertise into a business owned by one?
This distinction is crucial for business owners as it influences how an LLC is evaluated and divided, making an understanding of these legal nuances essential for anyone in Milwaukee facing a divorce involving business interests. You can read our previous guide “What Business Owners Need to Know About Divorce” for more on this topic.
3. The Legal Framework for LLCs During Divorce in Milwaukee
The legal framework governing the treatment of LLCs during a divorce in Milwaukee, and broadly in Wisconsin, is intricate, shaped by both statutory law and case precedents. Under this framework, if an LLC is deemed marital property—acquired or substantially grown through the efforts of either spouse during the marriage—it must be equitably divided. This equitable division does not inherently mean equal but aims for fairness, considering factors like each spouse’s contribution to the business and their economic circumstances post-divorce.
For LLCs established prior to the marriage, the increase in value during the marriage is often subject to division. The courts may employ various methodologies to evaluate the business’s worth, from analyzing financial statements to hiring valuation experts. Additionally, the legal framework accommodates agreements between spouses on the division of the LLC, whether through buyouts, continued joint operation, or other arrangements, provided they meet fairness standards.
4. Valuing an LLC for Equitable Division
Valuing an LLC for equitable division in a divorce is a critical and complex process, integral to ensuring fairness for both parties involved. This valuation determines the LLC’s worth on the market, considering not only its current assets and liabilities but also its earning potential, market position, and intangible assets such as brand value and intellectual property.
Various methods can be employed to arrive at this valuation, including the asset-based approach, which looks at the company’s net asset value; the income approach, focusing on the business’s potential for future earnings; and the market approach, comparing the LLC to similar businesses that have been sold recently.
The chosen method must accurately reflect the unique aspects of the LLC, from its operational intricacies to its financial health. Given the stakes involved, especially in high-asset divorces, parties often enlist the expertise of valuation professionals who can provide an unbiased assessment.
5. Protecting Your LLC Prior to Marriage
One of the most effective tools at your disposal for protecting your business during divorce is a prenuptial agreement, a legal document that outlines the ownership and division of personal and business assets in the event of a divorce. This agreement can specifically designate your LLC as separate property, ensuring its protection from marital asset division.
Beyond prenuptial agreements, other protective strategies include establishing a clear separation of personal and business finances, maintaining meticulous records to demonstrate this separation, and, if applicable, structuring your LLC’s operating agreement to include provisions that address what happens in the event of a divorce.
6. Options for Dividing an LLC During Divorce
In addition to considering LLC valuation and distribution as part of the overall equitable division process, parties may also explore alternative options for dividing an LLC like the following:
- Buyout Option: One spouse buys the other’s interest in the LLC, allowing for sole ownership and operational continuity while compensating the departing spouse.
- Selling the Business: Both parties agree to sell the LLC and divide the proceeds, a practical solution if neither wishes to maintain business involvement post-divorce.
- Continued Co-ownership: Spouses choose to retain their shares and operate the business together post-divorce, requiring effective communication and clear division of responsibilities.
- Equitable Distribution with Other Assets: Instead of dividing the LLC, other marital assets of equivalent value are allocated to one spouse, permitting the other to keep full ownership of the business.
- Structured Payment Plan: If a buyout is agreed upon but immediate payment is not feasible, establishing a structured payment plan over time can be an alternative, often secured by a portion of the business earnings or other collateral.
7. Seeking Legal Advice
Seeking legal advice from a qualified divorce lawyer in Milwaukee is an essential step for any business owner navigating the complexities of divorce, especially when an LLC is involved. A seasoned divorce lawyer with experience in handling cases with complex business assets can provide invaluable guidance on Wisconsin’s legal framework, ensuring that your rights and interests are protected throughout the process.
For a trusted divorce lawyer in Milwaukee, call Ohiku Law. Ohiku Law provides personalized legal representation with a focus on achieving equitable resolutions for its clients. Contact Ohiku Law today to schedule a complimentary consultation.
By Attorney Odalo Ohiku, Owner of Ohiku Law Office
Attorney Odalo Ohiku is a dedicated and experienced lawyer who focuses on divorce law, family law, and custody and placement for high-net-worth individuals in the Greater Milwaukee area. A trained mediator and arbitrator, Attorney Ohiku has the skill set, experience, and perspective to help clients safeguard their interests while minimizing the stress, anxiety, and conflict that can come with divorce. Attorney Ohiku’s credentials are exemplary: he has been honored as a “Top 40 under 40” by both The American Society of Legal Advocates and The National Trial Lawyers, served as Chair of the Wisconsin State Bar Board of Governors, and earned the President Award from the Wisconsin State Bar. He is passionate about his work in safeguarding families, ensuring that they can maintain the lives they have worked hard to build.
