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Ask a Lawyer -- LLCs
LLC Question 139
Question:
We have an S corporation consisting of 3 owners. Is our business protected if one of the owners should divorce? In other words, can the spouse of an owner come after that owners % of the business or obtain ownership rights? Thanks much.
Response: What happens to an LLC member's interest in a divorce? Short answer: whatever the LLC operating agreement says happens in case of a member divorce where the spouse of the non-member seeks an interest in the LLC.
What if there is no operating agreement or the operating agreement does not deal with this issue? Then I believe the situation is covered by Section 21-2621 of the Nebraska LLC Act (assume this is a Nebraska LLC), statute copied below.
Section 21-2621. Interest in company; transferability of interest; admission of additional members.
The interest of a member in a limited liability company constitutes the personal estate of the member and may be transferred or assigned as provided in the articles of organization or operating agreement. Unless otherwise provided in the articles of organization or the operating agreement, if a majority in interest of the members of the limited liability company other than the member proposing to dispose of such member's interest do not approve of the proposed transfer or assignment of part or all of the member's interest to a nonmember by written consent, the nonmember transferee of the member's interest shall have no right to participate in the management of the business and affairs of the limited liability company or to become a member, and the nonmember transferee shall only be entitled to receive the share of profits or other compensation by way of income and the return of capital to which the transferring member would otherwise be entitled. Unless otherwise provided in the articles of organization or the operating agreement, additional members shall be admitted only upon an affirmative vote of a majority in interest of the current members of the limited liability company.
What I think this statutes says is that, in case of divorce where the non-member spouse seeks an interest in the LLC, if a majority in interest fo the remaining members do not agree to admit the spouse as a new member, then the spouse is left in the position of essentially a creditor with no right to participate in management but "entitled to receive the share of profits or other compensation by way of income and the return of capital to which the transferring member would otherwise be entitled."
Submitted: 10/17/2007; Michele, NE
Response: 10/17/2007; JJR
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