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.

54 Comments

  1. Kimberly Tillett

    My husband is deceased. He formed a PLLC which has real estate property and a 401k plan for his benefit. He was the sole proprietor of the PLLC. It is not worth selling, and there is no one to carry it on. I would like to dissolve it and be assigned the community property. Am I able to just submit his death certificate and a form to be assigned the property?

  2. Eddie

    I own a Manager-managed LLC in Texas with an S Corp election for filing taxes. I am the Manager and the only member. I started the business in the 4th year of my marriage. My wife does not participate in the business, but I do have several employees.
    My wife has three children from a previous marriage, but we have no children together. Since the business is community property , my wife wants to leave her half of the business to her children. If my wife passes first, I’m fine with my stepchildren getting their share of the value of the business when I die or sell the business.
    However, in the interim, the business will be my only source of income. I understand that I can’t be forced to sell the business. But, will I be required to share any distributions with my stepchildren? Is my salary considered a distribution? Or would the 50/50 split of distributions be whatever profit is remaining after my salary?
    Also, would there be any restrictions placed on the amount of my salary? The IRS requires that my salary not be unreasonably low for the S-Corp election. Would a probate judge require that my salary not be unreasonably high?

  3. Michell Bradie

    Normally, the Company Agreement controls what happens in the event of the death of members, and spouses generally are required to sign their agreement as well when the entity is community property. You should probably speak with your attorney that helped you set up the LLC to make sure that you have some way to value the entity in the event that you spouse passes, and some way of having the entity buy out the deceased spouse’s community share in the sole-management community property. If you do not have other assets that can be given to buy out your wife’s interest, you could discuss some type of insurance to cover the buy-out costs. This is really something that you should be discussing with legal counsel.

  4. Michell Bradie

    No. You will need to go through some kind of administration to have authority to do anything.

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