When forming a new business, it’s important to make sure the ownership interest in the business is clear. Whether you are forming a C-corp, an S-corp, or an LLC, ownership of some kind is going to be distributed between the founders. We’ve discussed the importance of signing a stock purchase agreement; the same goes for an Operating Agreement in an LLC which outlines the membership interest percentage of each member.
If you are receiving shares of a corporation or a membership interest in an LLC, you may see a “spousal consent form” with your spouse’s name and some form of acknowledgement such as:
“I, [Spouse’s Name], spouse of [Participant’s Name] (“Participant”), have read and hereby approve the foregoing Agreement. In consideration of the Company’s granting my spouse the right to acquire the Shares as set forth in the Agreement, I hereby agree to be bound irrevocably by the Agreement and further agree that any community property or other such interest that I may have in the Shares shall hereby be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise or waiver of any rights under the Agreement.”
This is because California is what’s known as a community property state. That means all the assets that are acquired by either spouse during their marriage belongs to both spouses equally. So, if you receive shares, your spouse technically has a 50% ownership interest in those shares.
Does this mean your spouse is a shareholder of the company, or a member of your LLC? Not exactly. They are not the named recipient of the shares or membership interest, so they don’t have all the rights and privileges that come along with them. For example, the right to vote on company decisions such as electing the Board of Directors or to approve decisions for the LLC. They do, however, have certain rights that attach to community property, and this can cause issues for the company.
One rule of community property is that a spouse cannot gift, sell, or give away community property without the consent of the other spouse. This may be an issue if, for example, a founder’s stock purchase agreement is subject to vesting. What happens if they leave the company and some shares of stock are unvested? Those shares are, according to the terms of the agreement, supposed to return to the company. But what about the ownership interest of the non-founder spouse, who never signed that stock agreement? Technically, the founder spouse can’t “give” that stock back to the company without their consent, but the company has the right to automatically repurchase the stock. To avoid this type of conflict, it’s imperative that all spouses sign the spousal consent waiver at the time the shares are purchased or received.
Another example is electing to have your LLC or C-corporation taxed as an S-corporation. The S-corp election requires all “owners” of membership interest or shares to consent via signature on Form 2553. This includes the spouses of LLC members or corporate shareholders. If you don’t include signatures from all spouses, the IRS can revoke your S-corp status.
These principles apply equally to stock grants to employees, advisors, consultants, and investors, or new members to your LLC who join after formation. You should always include the spousal consent waiver in any grant of shares or membership interest to residents of a community property state. It is important to note that the spousal consent form doesn’t affect the ownership rights of the second spouse. They still retain their usual community property rights in the assets. The consent form simply allows the company and the receiving spouse to treat all the equity as subject to the agreed-upon terms of the stock agreement or LLC operating agreement.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.