Is an LLC S Corp Formed After Marriage a Marital Asset?

Question from Hot rod, Is an LLC S Corp Formed After Marriage a Marital Asset?

Answer from AI:

When you establish a business before marriage and later convert it into an LLC S Corporation after getting married, the classification of the business as a marital or separate asset in the event of a divorce can be complex. The determination of whether it is considered a marital asset depends on various factors, including the laws of the state where the divorce is taking place and the specific circumstances surrounding the business’s conversion and operation.

Understanding Marital vs. Separate Property

Generally, in the United States, there are two types of property in a marriage:

• Marital Property: This includes assets and debts acquired during the marriage. Marital property is typically subject to division during a divorce.
• Separate Property: This includes assets and debts owned by one spouse before the marriage or acquired by gift or inheritance. Separate property is usually not divided during a divorce.

However, separate property can become marital property if it is commingled with marital assets or if both spouses contribute to its increase in value during the marriage.

Impact of Converting to an LLC S Corporation After Marriage

When you convert a premarital business into an LLC S Corporation after marriage, several factors will be considered to determine if it is a marital asset:

1. State Law: Different states have different rules regarding property division. Some states are “equitable distribution” states, where assets are divided fairly but not necessarily equally. Other states are “community property” states, where marital property is divided 50/50. The classification of your business may vary based on your state’s laws.
2. Commingling of Funds: If you have used marital funds to invest in the business or if both spouses have contributed to the business’s growth, the business may be considered marital property.
3. Value Appreciation: If the value of the business has increased during the marriage due to the efforts of either spouse, that increase in value may be considered marital property.
4. Ownership and Control: The way the business is owned and controlled after becoming an LLC S Corporation can also affect its classification. If both spouses have a stake in the business or if one spouse has relinquished certain rights, this could impact the determination.

Protecting Your Business in a Divorce

To protect your business in a divorce, consider the following steps:

• Prenuptial or Postnuptial Agreement: A prenuptial or postnuptial agreement can specify the business as separate property and outline how it should be treated in the event of a divorce.
• Maintain Separate Finances: Avoid commingling personal and business finances to help maintain the business as separate property.
• Document Contributions: Keep clear records of any contributions made by your spouse to the business to determine appropriate compensation if necessary.

Seeking Legal Advice

Because the classification of a business as a marital or separate asset can be legally complex and varies by state, it is essential to consult with a family law attorney who can provide advice based on your specific situation. An attorney can help you understand how your state’s laws apply to your case and can assist in drafting agreements to protect your interests.

For more information on property division in divorce, you can refer to the Legal Information Institute’s overview of marital property. Always remember that legal information provided in this format is not the same as legal advice tailored to your individual circumstances.