Owning a Limited Liability Company (LLC) offers protection for your personal assets, but what happens to your LLC during a divorce in Texas? This can be a complex issue, particularly if you are the sole member. Here, we’ll explore how Texas courts might handle your single-member LLC in a divorce settlement.

Is Your LLC Considered Marital Property?

Texas operates under a community property system. This means most assets and debts acquired during the marriage are considered jointly owned by both spouses. While an LLC itself is a separate legal entity, the court will examine several factors to determine if your membership interest is considered marital property:

  • When was the LLC formed? If formed before your marriage, it’s generally considered separate property. However, if the LLC increased in value during the marriage due to your spouse’s contributions (financial or managerial), that appreciation might be considered marital.
  • Did your spouse contribute to the LLC? Even if formed before marriage, if your spouse financially supported the LLC or played a managerial role during the marriage, you might have a claim to a portion of the increased value.
  • Commingling of Funds: Did you use marital funds to operate the LLC? This could blur the lines between separate and marital property.

Important: The burden of proof lies with your spouse to demonstrate that the LLC or a portion of it is marital property.

What Happens to Your Single-Member LLC in a Divorce?

If the court determines your LLC membership interest is marital property, there are several possibilities:

  • Buyout: You can buy out your spouse’s interest in the LLC. This may involve using marital assets, separate assets, or a combination of both.
  • Spouse Receives Membership Interest: The court might award your spouse a direct ownership interest in the LLC. This can be complex and might require amending the LLC’s operating agreement to accommodate your spouse.
  • Sale of the LLC: In some cases, the court may order the sale of the LLC and division of the proceeds according to the community property principles. This is typically a last resort due to potential tax implications and disruption to the business.

Protecting Your Single-Member LLC in a Divorce

There are proactive steps you can take to minimize the impact of your LLC on your divorce:

  • Prenuptial Agreement: A prenuptial agreement drafted before marriage can clearly define how the LLC will be handled in case of divorce.
  • Postnuptial Agreement: Similar to a prenup, a postnuptial agreement established during your marriage can address the LLC’s ownership and division during divorce.
  • Clear Operating Agreement: A well-drafted operating agreement outlining your sole ownership and management rights can strengthen your case for keeping the LLC separate from marital property.
  • Maintain Separate Finances: Avoid using marital funds for the LLC whenever possible. Presenting the court with clear financial records will be crucial.

Don’t Face Divorce Alone

If you are concerned about your single-member LLC and its treatment during a Texas divorce, contact attorney Gregg Lundberg today. We can help you navigate the complexities of Texas community property laws and protect your business interests. Schedule a consultation to discuss your unique situation and develop a strategy to achieve a fair and favorable outcome.

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