What Does A Community Property Interest In A Limited Liability Company (LLC) Get You?

A member’s interest in an LLC may be community property if that interest was acquired during marriage.  However, the member’s right to participate in the management and conduct of the business entity is not community property.

What that means is that if a member in an LLC gets a divorce, the member’s spouse, if any, is only an assignee of the membership interest.  The member’s spouse may be entitled to receive a portion of the economic benefit if there is a distribution, but will have no right of management and control of the business.

If a member in an LLC dies, then the member’s spouse, if any, and an heir, devisee, personal representative, or other successor of the member, may be an assignee of the membership interest.  Again, the member’s spouse (or heir, devisee, personal representative, or other successor of the member) may be entitled to receive a portion of the economic benefit if there is a distribution, but will have no right of management and control.

Also, if the spouse of the member should die, their community interest in the LLC will only serve to transfer an assignment of the membership interest to a non-member heir, devisee, personal representative, or other successor of the member’s spouse.  That non-member heir, devisee, personal representative, or other successor of the member’s spouse will have no right to participate in the management and conduct of the business.

This has no effect on the ability of the members of the LLC to prepare agreements for the purchase or sale of a membership interest at any time.  Often times, buy/sell agreements are prepared to deal with the event of a member’s death or divorce.

So, the member’s interest in the LLC may be community property, but not the member’s right to participate in the management and control of that LLC.

20 comments to What Does A Community Property Interest In A Limited Liability Company (LLC) Get You?

  • rand

    Do you know if this article applies to California community property with regard to the death of a California LLC member. Does the surviving wife have any right of management and control of the business or does she just receive economic rights?

  • Michell Bradie

    Since I am not licensed to practice law in California, I am not able to give you an opinion regarding California law. I would recommend that you contact an attorney in that jurisdiction.

  • in a divorce temp order, if both spouces are managing members and own the LLC equally, can the court award the LLC to one spouse and bar the other from accessing the premisses and remove that members right to manage the LLC?

  • Michell Bradie

    I do not handle divorce cases, so may not be the best person to discuss what courts do with their temporary orders. You should discuss that with your divorce attorney.

    When our office creates LLCs that have multiple members, we include language in the Company Agreement (also known as Regulations or Operating Agreements) to deal with the issues of death, divorce, disability, and disgust (someone just wants out). These are what I call “The 4 Big D’s”. Many times these issues are not covered when folks use on-line services or non-lawyers to create their LLCs for them. So while they may save some money up front in creating their entity, it often costs them far more money down the line in litigation costs.

    Since both of you are managing members of the LLC, I am going to assume that the entity was formed during marriage, making it community property under the laws of Texas. Generally, both managing members have the right of management and control, unless the Company Agreement states otherwise. Upon divorce, the Company Agreement should control what happens, and the Judge will consider the value of the asset in making the just and right division of the property. However, pending the divorce, someone needs to run the business and preserve the value of the asset. If the two of you can’t work together to do that, then the Judge is the likely party to make the decision as to which of you should have the right to temporarily run the business.

    If we use the example of another asset, like a house, it may make it easier to understand. If a house was bought during marriage, it is presumed to be community property, and both spouses have an interest in it. Upon filing for divorce, the Judge can award one spouse the temporary use of the house and prohibit the other spouse from accessing it and taking property out of it. This doesn’t necessarily mean that upon the final divorce the spouse that has been temporarily living in the house will get to keep it.

    So, unless your Company Agreement gives you guidance on who has the right of management while a divorce is pending, the temporary orders are likely to control. Again, you should probably discuss this with your divorce attorney.

  • Marsha Adams

    If my husband owns an LLC and he is in major debt, can I be held liable for those debts in our divorce? We are in Texas. Will a value be placed on the business as an asset too?
    Thanks

  • Michell Bradie

    If the LLC was created during the marriage, then it is still community property, although it may be sole management community property (managed by your husband). There will be a value placed on the business as part of the divorce IF it is community property, since that will be considered in a “just and right” division of the property.

    If your husband has properly handled the LLC so that there is no basis for personal liability, then the entity alone would be responsible for the entity’s debt. That would clearly affect the value of the business. (It is unclear from your question if the debt was the obligation of the LLC or your husband.)

    If it is your husband’s debt, then divorce does not affect the rights of creditors, and both you and your husband are both jointly and severally liable for that debt, regardless of whom the judge says is required to pay the debt. Even if your husband is given the debt in divorce, the creditor can still proceed against you if he fails to pay it. That may give you a right to sue your ex for the debt, but it will not prevent a creditor from trying to collect against you.

  • Cathycurtain

    In Louisiana, my husband created an LLC for rental property before we were married, but since we have gotten married several more rental properties have been bought. If we divirce am i entitled to half of the rents or half of the profits if sold? Or would they be considered his since the LLC was created before marriage.

  • Michell Bradie

    The laws of each state are different, and Louisiana law is very different than Texas law. I am only licensed to practice law in Texas, and am unable to advise for any other state. I would recommend that you contact an attorney in Louisiana to answer your question.

  • Heather

    My spouse started a LLC in the third year of our marriage in their name only. We live in Texas and this LLC receives distributions every quarter. Though I am not signed on the LLC, would I be correct in assuming that if we were to divorce, that the LLC would be considered community property and that I would be entitled to a portion of future profit distributions that go to that LLC as an assignee? And if so, is there usually an indication of how long I would be entitled to future contributions after divorce is settled?

  • Michell Bradie

    You are correct that unless there is some type of separate property agreement, you do have a presumptive community interest in the LLC that was created during your marriage. However, the way that your interest would be handled in a divorce would probably be covered by the terms of the Company Agreement itself.

    If you signed as a spouse accepting the terms of the Company Agreement, it likely provides that you would be entitled to some financial value rather than an actual interest in the business upon a divorce, since you are not currently a named member of the LLC. In other words, the court will take the value of the business, and the percentage ownership interest that you husband holds, into consideration in making a “just and right” division of the community property in the divorce. It is likely going to be considered sole-management community property with the Company Agreement (also known as an Operating Agreement or Regulations) controlling how the interest is valued and paid out or divided.

    When our firm assists our client with forming LLCs, especially when there are other members involved, we encourage our clients to deal with the issues of how to transfer and value the LLC interests in the event of death, divorce, disability or disgust/distrust between members. That is not to say that all Company Agreements will address those points, since every attorney drafts things a bit differently. I do not handle divorce cases, so you should probably talk with an attorney that handles divorce cases that can review the terms of the Company Agreement and let you know with the LLC documents say. Hope that helps!

  • Heather

    Thank you and no, I did not sign any Company agreement or any kind of document for that matter so I’m guessing I should be covered. One last question, is there anything that my spouse can do now to lock me out of the LLC to protect them from a divorce between now and filing in the near future?

    Thanks so much!

  • Michell Bradie

    This would be handled no differently than any other asset of the estate if your spouse tried to hide it or sell it for less than fair market value in anticipation of a divorce. Since I don’t handle divorce cases, I can’t advise on what actions a Judge might take when one of the parties acts wrongfully to hide or destroy community assets, but I doubt that they would be very pleased with the wrong-doing party.

    Again, even had you signed the Company Agreement, it doesn’t mean that you have given up your community interest in the asset. All that might mean is that you agreed on how the Company Agreement determined that it should be handled. Sometimes, that might mean allowing the entity to buy back the member’s interest, or it could mean that you would be entitled to be paid a certain amount over time rather than giving you a membership interest in the business. Since all of that is very specific to each LLC, you would really have to look at the terms of the agreement between Members, since they all signed the Company Agreement (or should have, at least) agreeing to the terms.

  • Bill

    If a single memeber llc I formed during my marriage with me as sole member takes deed over property I inherited, does that remove the separate property status in texas and make it community property?

  • Michell Bradie

    The answer to your question is maybe. If an entity is formed during marriage, then unless you have some type of separate property agreement (prenuptial or postnuptial) then the entity is community property in Texas. It may be sole management community property, but it is community property never the less. If you transfer separate property into a community asset, you do run the risk of commingling that asset, which may cause it to become community property. Just like if you put cash that was inherited into a joint checking account, after a while it becomes hard to trace it back to your separate property, and it often becomes community property.

    I do not handle any divorce work, so the tracing of property to establish the character is not something that I regularly do. On death in Texas, the presumption is that all community property is owned 50/50 between the spouses, where in a divorce, it is subject to a “just and right division” which may be something different than 50/50. All property acquired during marriage is presumed community property, so you must prove by “clear and convincing” evidence (which is a higher burden than a preponderance of the evidence) to show that it is really separate property. So, you may be able to prove through tracing that it was your separate property when it went into the LLC, but then you must overcome the presumption that you made a gift to the community of your separate property. So it would depend upon whether the judge or jury believed, by clear and convincing evidence, that it was your separate property, and that you never intended to make a gift to the community estate. Since I don’t have a crystal ball, there is no way I could tell you what the outcome would be.

  • Bill

    Thank you for a quick response and honest information

  • Michell Bradie

    You are quite welcome.

  • Steve

    How do you remove a spouses claim to interest in a LLC (property building) for a divorce settlement. The spouse is not a partner
    and will take a cash payment for her value of community property interest. Will the judges settlement agreement suffice? or is their
    some other legal instrument to do this like a Interspousal Transfer Deed
    to protect me in the future

  • Michell Bradie

    If you have a properly prepared LLC, the Company Agreement should control what happens in the event of divorce, and it would have been signed by the non-member spouse at the time the other spouse signed the Company Agreement becoming a member. By having the non-member spouse sign agreeing to all the terms of the Company Agreement (sometimes referred to as Regulations), they are agreeing to be contractually bound by that Agreement. It should include some way to value the property, and discuss whether a purchase or transfer is required, by whom, and how long they have to pay it out.

    If you do not have a well drawn Company Agreement, that can make things difficult. If it is not properly dealt with in the Company Agreement, the court may allow the Sole-Management Community Property to be retained by the member-spouse and give some other community property to the non-member spouse to make the “just and right” division. If there are insufficient assets to do that, the court may require that the interest be sold to divide the value of the LLC interest held by the member-spouse. How the interest in the LLC is valued is likely to be something that is litigated if not properly dealt with in the Company Agreement. That will be up to the judge or jury if the parties don’t reach agreement. Since you are not dealing with real property, an Interspousal Transfer Deed would not be appropriate.

  • Sona A

    I have a LLC in my name and my husband name is not there. We are in the verge of divorce. I am planning to leave my his house and buy a new property using my llc. He can’t be a member of llc due to immigration reasons. He can’t work in two companies at the same time. So if you get divorced will the house bought thru llc be considered as community property ? I leave in Texas.

  • Michell Bradie

    I am not a divorce attorney and am not able to tell you what actions the court may take. However, I can tell you in general what community property is. How it is handled in a divorce can be very different than how it is handled in probate.

    All property acquired during marriage, with some exceptions like gift, devise, and descent, or as compensation for pain and suffering, etc., is presumed to be community property if there is no pre- or post-nuptial agreement to the contrary.

    If the LLC was formed during marriage, regardless of who is listed as the Member, it would generally be considered community property in Texas. It may be sole management community property, but community property none the less, and something that the court would look at when considering a just and right division of property between the parties in a divorce.

    Even if your LLC was set up prior to marriage, and thus separate property, if you use community funds to purchase the house in the name of the LLC to try to claim it as your separate property, that may be considered committing a fraud on the community. I would strongly suggest that you speak to an attorney that handles family law / divorce cases before doing anything like that.

Leave a Reply

 

 

 

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>