Attorney
The LLC is the entity of choice for a majority of New Mexico business owners. So it is not surprising that New Mexico’s family law courts are quite familiar with the challenges that arise when LLC owners get divorced.
Before you start Googling, “What happens to my membership interest? Can my spouse become a co-owner of my company? Will I be forced to sell?” Or begin to run through different worst case scenarios in your head, it is time to contact an attorney like Bob Matteucci, who knows as much about the business world as he does family law.
Bob actually decided to go to law school after going through the divorce process as a business owner, and wishing there was an attorney who actually understood balance sheets and bottom lines to guide him. Today, he is that attorney, and he regularly helps LLC members figure out how their operating agreement meshes with New Mexico’s community property law and our state’s Limited Liability Company Act (Chapter 53, Article 19).
The Starting Point: Your LLC Interest Is Likely Community Property
New Mexico is a community property state. That means property built up or acquired during marriage generally belongs equally to both spouses, regardless of whose name is on it. During a divorce, the value of all equally owned property (often called community or marital property) must be divided 50/50 unless there is a good reason not to do so.
A membership interest in an LLC is considered personal property under §53-19-31 of the LLC Act. This sort of property (or at least its appreciated value) is presumed to be community property unless there is clear evidence that it was not purchased, created, or grown using marital income, time, or effort.
This presumption, however, doesn’t mean your spouse automatically becomes a member of your LLC. Or can demand it be liquidated at divorce. It simply means the value of your interest belongs to the community and shall be addressed in your divorce agreement.
What that looks like in practice varies considerably depending on how many members are in the LLC and what your operating agreement says.
Scenario 1: You’re the Sole Member
Classifying, valuing, and dividing the value of a single-member LLC is relatively straightforward since there are no other members to contend with, and the operating agreement is less likely to include transfer restrictions.
However, most of the people in the Albuquerque area that Bob has worked with choose not to transfer any legal ownership of the LLC to their ex. Instead, most couples opt for what is essentially a buyout: the original LLC member keeps the business, and the spouse receives equivalent value through other assets like real estate, retirement funds, cash, extended spousal support (aka alimony), or some combination of those.
In order to make this happen, the LLC must be accurately valued, which is when things can get complicated. The value assigned to the LLC needs to reflect not just the balance sheet but also goodwill, cash flow, and any appreciated value directly attributable to marital contributions.
Bob Matteucci’s business background is particularly useful here. He approaches business valuation questions like they are more than a procedural legal hurdle… because they are! They affect how the business operates and may influence your exit strategy years down the line.
Scenario 2: You’re One of Multiple Members
Multi-member LLCs introduce a layer of complexity that single-member entities don’t have: your co-members have rights too, and they almost certainly did not sign up to be in business with your spouse.
Under §53-19-32 of the LLC Act, a membership interest is assignable, but an assignment alone does not make the assignee a member. Until the assignee is formally admitted as a member (which under §53-19-33 requires unanimous consent of existing members unless the operating agreement says otherwise) the assignee receives only the economic benefits of membership. They do not get voting rights, management authority, or access to company books and records.
This distinction between economic interest and membership rights is the key to preserving the peace in multi-member LLC divorces. Even if your ex-spouse ends up with a portion of your LLC interest, existing members can typically block them from getting a seat at the table. They get the economic benefit of belonging, but have no say in how the LLC operates.
Of course, if the goal of your divorce is a clean break that allows everyone to move forward, a simpler solution is doing a negotiated buyout. Either you or the LLC fairly compensates your ex for releasing any claim they have on your membership interest in the divorce agreement. Once again, this is a situation where having Bob Matteucci in your corner pays off since he appreciates exactly how big of a bargaining chip business interests can be.
What Your Operating Agreement Can (and Can’t) Do
In an ideal world, all divorces involving business assets would be resolved amicably. The reality is family court judges sometimes have to step in and order the spouses to divide their assets a certain way.
Some judges will look at an LLC’s operating agreement, see it contains transfer restrictions, and order that the non-member spouse be awarded other assets to buyout their community interest.
Others will say our state’s community property laws trump private agreements, and transfer a membership interest to a non-member spouse. This does not mean the operating agreement is null and void, it can still restrict the non-member spouse from acquiring management rights (as discussed above). And it can limit the spouse’s ability to sell their interest to an outside party.
Now is the time to have an attorney take a close look at your operating agreement to see what protections it offers, and what it might look like if a family court judge decides to ignore some of them. This is valuable information to have as you head to the negotiating table.
Serving Families with Dignity & Compassion
How your LLC membership interests are classified, valued, and potentially divided during a divorce are financial and strategic questions as much as legal ones, which is why the attorney you work with matters.
Bob Matteucci counsels business owners and professionals throughout the Albuquerque area and New Mexico who are going through the divorce process. His business background and focus on helping everyone involved move forward can give you peace of mind during what is often one of the most challenging times you or your business will ever face. Contact Matteucci Family Law today to set up a meeting to discuss your case.