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Pocatello Business Law Protecting LLC Business Owners From Divorces, Death And/Or Disability

By Lane V. Erickson, Pocatello Business Attorney

Nobody goes into a Limited Liability Company (LLC) business planning to fail. Stated another way, when a group of people get together to start a business, they are doing it because they plan to succeed. None of them wants to think about the failure of the business they are trying to start. While this is understandable, it is a mistake.

As a business attorney, my job is to look down the road to the future and think about all the worst things that could possibly happen to the business my clients are trying to start, and then come up with a plan to protect my clients from those worst things. Some people refer to this as risk management. Others use the catchy phrase “hoping for the best and planning for the worst”. As a business attorney, I personally believe that this type of plan is just common sense. 

At the Racine law office our team of premier Idaho business attorneys understand the importance of making sure that our clients have a well thought out business plan that protects them from the bad stuff that often happens in life.  We have helped numerous clients with these types of business planning for more than 70 years. Our team is made up of partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our attorneys have decades of experience, knowledge, and skill in helping business clients deal with all of their business needs including planning for the future. 

So, what are some of the bad things that can happen to our clients when they are operating their business? The simplest ones that our clients should plan for include divorce, death, or disability. If any of these things happen to our clients during the operation of their business, it could obviously have a big impact on the business itself, as well as on the other owners of the business. Because of this, we use the Operating Agreement of the LLC as the document that provides a specific plan for the continued operation of the business, and how the ownership interests of the owner(s) involved, and the other owners will be affected. 

To help you better understand how using an Operating Agreement helps, we will discuss each of these potential bad things individually and how the operating agreement can protect both the business and the other owners when one of these things happens. 

Divorce

We will start with divorce. Idaho is a community property State. As a result, any ownership interests that a spouse obtains during the course of a marriage, even when it includes an ownership interest in a business, could be considered a community property interest. This simply means that both the husband and the wife have an equal ownership interest in that particular asset. 

If one of the owners of a business gets a divorce, it’s possible that the other spouse could obtain a divorce decree stating that they are entitled to one-half of that ownership interest in the business. In other words, assume that three friends go into business together. They each agree that they will each own one-third of the business. One of those owners gets a divorce several years after the business is created. In this instance, through the divorce decree entered by the Court, that owner’s spouse could be awarded one-half of that owner’s one-third interest in the divorce. 

In this example, instead of there being three owners, there are now four owners of the business. Additionally, the divorced owner’s ex-spouse now owns a 1/6 interest in the business. This gives them the right to vote, and to seek some control of the business itself. 

Most business owners would agree that they never contemplated being in business with the other owners’ spouses. The problem is that without some planning, this is exactly what can happen. However, through the operating agreement, this type of ownership interest can be restricted. In other words, several protections can be put in the operating agreement for the business and the other business owners. These could include an automatic by out of the divorced owner’s ex-spouse. You could also include a restriction on the right to vote, or the right to manage any of the business operations. Further, the Restriction could simply be that all that owner has a right to is to receive any distributions from the business that occur. 

Death

A similar situation, and similar protections can be put in place in the operating agreement if one of the owners were to die. As mentioned above, and ownership interest in a business is an asset that belongs to the owner. When an owner dies, that ownership interest in the business is part of their estate that will be transferred through a Last Will and Testament or through the laws of intestacy when no Will exists. 

For example, assume that one of the three business owners passed away. In that instance, if their last will and testament and/or the laws of intestacy say that everything they own goes to their spouse, that deceased owner’s spouse now owns the deceased owner’s one-third interest in the business. Unless there are some restrictions or protections in the operating agreement, that deceased owner’s spouse now has the same rights of control and management that the original deceased owner had. 

The operating agreement can be used to curtail this right in a couple of ways. First, the operating agreement can say that if an owner dies, the business itself, or the other owners of the business have a right to purchase the ownership interest from the deceased owner’s estate. The operating agreement can provide a formula for how that ownership interest will be valued. Additionally, the operating agreement can provide a payment structure for how the ownership interest will be purchased. by doing this, the other owners are protected in their ability to manage and control the business. On the other hand, the surviving spouse is protected because they will receive the actual value of the ownership interest of the deceased owner. 

Another way the operating agreement can protect the business and the other owners is by simply stating that when an owner passes away, their ownership interest can be passed to their spouse or other heirs however those individuals will only have a right to distribution and no other rights. In other words, they would not have a right to any management or control of the business. They would only have the right to receive any payments or distributions that are made to the owners of the business. 

Disability

Disability is yet another way that problems can arise in the operation of a business. If an owner, who is involved in the management of the business, becomes disabled and can no longer operate, there needs to be a plan in the operating agreement about how management of the business will go forward. the operating agreement can spell out the rights and options that exist for the other owners of the business if a disability were to occur. 

As you can see, there are a number of ways that the operating agreement of an LLC can protect all of the owners of a business in the event one of the owners is involved in a divorce, a disability, or death. We have helped numerous business owners create a customized operating agreement for their business that provides these types of protections. We are confident that we can help you too! 

  Enlist a Pocatello Business Attorney to Help You  

Our team of Pocatello business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, to provide protection to the owners we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Pocatello business problems.

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