Is Your Business Protected During a Divorce? Understanding Prenuptial Agreements and Operating Agreements in Maryland

Is a Business Considered to be Marital Property in Maryland?

Maryland Code, Family Law § 8-201(e) generally defines “Marital property” as the property, however titled, acquired by one or both parties during the marriage, unless the property was acquired before the marriage, acquired by inheritance or gift from a third party, excluded by valid agreement, or directly traceable to any of these sources.

Consider a spouse who starts a company during marriage. That spouse is the sole member of the company, and the other spouse has never worked for or otherwise participated in the business. Even though the company is entirely owned by one spouse, the ownership interest may still be considered marital property because it was acquired during the marriage.

But what if the company was established before marriage? Although the original ownership interest may be considered nonmarital property, the analysis does not necessarily end there. Questions may arise concerning increases in the business’s value during the marriage, particularly where marital funds or efforts contributed to that growth. Depending on the circumstances, some portion of that increased value may be considered marital property, even though the business itself was established before marriage.

How Can a Prenuptial Agreement Protect Your Business?

A prenuptial agreement allows prospective spouses to establish certain financial rights and obligations before marriage, including how specified property will be treated if they later divorce.

For business owners, a properly drafted prenuptial agreement may address:

• Whether an existing business remains separate property;
• Whether increases in the business’s value during marriage remain separate;
• How future businesses or ownership interests will be classified;
• Whether business distributions, profits, or proceeds from a sale will be considered marital or separate property; and
• How marital contributions to the business will be treated.

By addressing these issues in advance, a prenuptial agreement can reduce uncertainty and potential disputes concerning business ownership and valuation if the marriage ends.

What About Your LLC’s Operating Agreement?

An LLC operating agreement generally governs the company’s internal affairs, including its management, ownership rights, distributions, and transfers of membership interests. Under Maryland Code, Corporations and Associations § 4A-402, operating agreements may establish rules concerning the management of an LLC, sharing of earnings, assignment of membership interests, and admission of new members.

An operating agreement may also contain provisions addressing what happens if a member gets divorced. For example, an operating agreement might restrict transfers of membership interests, require approval before admitting a new member, or establish buyout procedures following specified events. These provisions can help protect the company and its other members from unwanted changes in ownership or management. However, an operating agreement is not necessarily a substitute for a prenuptial agreement.

Why Both Agreements May Be Important

An operating agreement primarily governs the relationship among the LLC and its members, and may help protect the other LLC members from an unwanted transfer of membership rights. However, it may not prevent the divorcing member’s spouse from asserting that some or all of the value of the membership interest is marital property.

A prenuptial agreement serves a different purpose by establishing certain financial rights and obligations between spouses. An agreement specifically addressing the business interest may provide additional protection by establishing how the spouses intend that interest, including any appreciation in value, to be treated upon divorce.

Although these agreements serve different purposes, they can work together to protect both the business and the individuals involved.

Planning Before Problems Arise

Business owners often spend considerable time planning for business risks, including liability, succession, ownership disputes, and unexpected departures of members. Divorce is another potential event worth considering when establishing or reviewing those plans.

At Lewicky, O’Connor, Hunt & Meiser, LLC, attorney Samantha Y. Chan practices both business law and family law, providing clients with guidance on the intersection of business ownership, marriage, and divorce. Whether you are starting a business, preparing for marriage, or navigating a divorce, understanding how these areas of law overlap can help you protect your interests, anticipate potential disputes, and make informed decisions about your future.