How an LLC Is Valued During Divorce Proceedings

Don’t the divorce proceedings induce enough anxiety? When you throw your primary income source into the mix, you face even bigger challenges than the average separation process. Clients often face this obstacle when they prepare to divorce someone who isn’t just their spouse but their business partner as well.

How is an LLC treated in a divorce? Lincoln & Wenk, PLLC’s divorce lawyers in Phoenix, AZ, explore this question below. Find out whether your divorce will affect your business ownership and how the law looks at things.

How Arizona Divorce Courts Treat Assets During Divorce

Before discussing who receives LLC ownership in divorce, you must first understand how Arizona divorce laws work. Arizona’s divorce courts view assets as either community or separate property. We cover those definitions below.

What Does the Court Consider to be Marital or Community Property?

Community property includes the assets you and your spouse acquired during your marriage. If you purchased a property in wedlock, that property belongs to both of you in the eyes of the court. Starting a business during your marriage might also mean the LLC falls under those community property laws.

What Does the Court Consider to be Separate Property?

Separate property would be the assets you acquire outside of marriage, which can mean one of two things:

1. You received or bought the asset before you married your spouse.
2. You inherited the asset, and your marital status at the time doesn’t matter.

A property you purchased before marriage will still belong to you after the divorce. Similarly, starting a business before you marry (or inheriting one) cements your ownership under the law, although some exceptions may apply.

When Might Your Spouse Have Ownership Over an Otherwise Separate Asset?

Let’s stick with the business example. How does a separate asset become a community one? Sometimes, as a married business owner, you might:

• Accept your spouse’s offer to invest monetarily or otherwise into their business
• Hire your spouse as an employee at your business
• Grant your spouse a portion of ownership of the business during the marriage

These and similar scenarios may influence the court’s decision to label your LLC as a separate or community asset. If spouses contributed personal resources to the business’s growth, the court could award them partial ownership during the divorce proceedings.

How Is an LLC Treated in a Divorce?

What is an LLC, exactly? A limited liability company comprises a business structured to protect its owners from legal liabilities and debts in their personal capacity.

How is an LLC treated in a divorce? In Arizona, if you own an LLC that the spouse you’re divorcing contributed to in some way, you will likely undergo a business valuation process to determine who receives what ownership or asset share. See more about the LLC valuation process below.

Scheduling the Business Valuation Date

The courts don’t randomly draw valuation dates from a hat. Typically, they choose:

• The end of the fiscal calendar year
• The month ending before serving the divorce petition
• The month ending before the divorce trial

The court selects dates fairly to protect each party’s interest, within reason.

Valuing the Business in a Divorce

When the LLC’s valuation date arrives, the court will determine how much your business and its connected assets are worth. It does this through either the fair market value or fair value approach.

• Fair market value is the business’s worth when an enthusiastic purchaser would buy it from an equally enthusiastic seller. It only accounts for the asset’s current static worth rather than its growth potential.
• Fair value determines the worth in a hypothetical enthusiastic sale situation, but taking growth potential and other market trends into account.

What Determines Business Value Under the Law?

So, how is an LLC treated in a divorce, and what is the business impact in divorce proceedings? All of that depends on the following factors:

• Market value: What are your average product or service prices to those of similar businesses in your industry?
• Earning value: How much could your business potentially make in the near future? This figure determines your earning value.
• Collective assets: How much are your current business-related assets, liabilities, and debts worth? This sum helps the court calculate the overall business value.

Competent Arizona divorce attorneys can help you determine which valuation method suits your business and interests more, as these details are unique to each case.

What Did the Spouse Contribute to the Business?

Arizona’s marital business division laws also explore whether a spouse contributed to the LLC’s growth. The types of contributions spouses make to a business may include:

• Personal efforts and resources: If a spouse has documented proof of their personal time, money, or energy to grow the business, they may unlock some measure of ownership during the divorce.
• Business employment or income source: Was a spouse employed at your business during the marriage? Did it supply part or all of the household income? These arrangements can further complicate matters in a divorce.
• Community money investment: Did you or your spouse use marital money to fund the business? If so, such an investment could place the business, at least partially, under community property.

When spouses rely on or invest in businesses their partners own, the court ruling may include some ownership or spousal support.

How Is the LLC’s Value Distributed After a Divorce?

How is an LLC treated in divorce? And how does LLC asset distribution work?

If the court rules that a spouse made no significant contributions and didn’t heavily rely on the business, the divorcing business owner may retain much or all of their ownership and assets. However, many divorce judges will rule that businesses count as marital property in some way. Under these circumstances, you have a few options like:

1.  Selling your portion of ownership. You could transfer your ownership if your spouse retains some of it and you don’t want to continue working with them.

2.  Purchasing your spouse’s ownership. You could buy your ex-spouse’s portion to earn full control over the whole operation.

3.  Selling the business altogether. Perhaps neither party wants the responsibility of business ownership and would rather start over. You could sell the business and split the profits according to the court order.

4.  Maintaining your awarded ownership and co-owning the LLC. Some ex-spouses can still relate to each other on a professional level, sometimes even more so than in the marriage. In such cases, they may continue running the business together.

Alternatively, if your soon-to-be ex relied on your business’s income to support the household, you might pay alimony or spousal support.

How Can You Protect Your Business?

How is an LLC treated in a divorce? Now that you know more, you might wonder what you can do to protect a business you built from the ground up. This independence is especially important to people who cannot trust their ex-spouses to protect the business’s current interests or future growth. However, protecting LLC assets begins long before one party files for divorce – see the examples below.

Prenuptial Agreements

Before you marry, you might draw up a prenuptial agreement that covers your business and its assets. These legally binding contracts protect each party’s assets and financial resources once they enter a marital union.

An Arizona prenup must:

• Be written to include necessary law language and terminology that accurately defines contract terms.
• Bear the signatures of both willing spouses.
• Be witnessed by a notary public.
• Be drafted and signed long before the official wedding date.

You might also include other marital elements, like custody arrangements and each party’s financial obligations, should you dissolve the marriage.

Separating Marriage and Business

Divorce and business interests make messy bedfellows. Separating the two from the start often keeps a potential divorce process cleaner.

You might still face communal property division if you established your business after your wedding. However, if you inherit the business or start it before you marry, why not keep it as separate from your marriage as possible? In addition to drafting and signing a prenuptial agreement, you may want to avoid:

• Using specific marital or community resources to improve or protect the business
• Accepting investments from your spouse
• Employing your spouse at the business

Proceed with caution; these actions may dredge up negative feelings within an otherwise working marriage.

Equitable Allocation Preparation Ahead of a Divorce

You’ll want to accept that, should you divorce, the court might award your spouse partial ownership of the business. However, if you can move through your marriage and business dealings by documenting everything, like your investments alongside your spouse’s, it’s easier to prove how your investments compare. Doing this may prepare you for evidence-based, equitable allocation during a divorce.

Seek Business Division Guidance From Lincoln & Wenk, PLLC, in Phoenix, Arizona

So, how is an LLC treated in a divorce? Arizona treats it much like any other profitable asset or investment and divides its assets in a way that honors each spouse’s contribution.

Call Lincoln & Wenk, PLLC, for legal guidance in an Arizona divorce at 623-294-2464. You can also learn about assets in a revocable trust and other ways to create a well-rounded financial future.