Business is Business: What Divorce Could Mean for Your LLC

Limited liability companies are a staple of the Texas economy. The key element of LLC’s is not the person; the key element is the entity itself. So what happens to LLC’s in divorce cases?

I. Are Interests in LLC’s Community Property?

A membership interest in a limited liability company can be considered community property. TEX. BUS. ORGS. CODE § 101.106(a-1). If such membership interest was created or acquired during the marriage, it is presumed to be community property under Texas law. See TEX. FAM. CODE § 3.002; see also TEX. FAM. CODE § 3.003. However, a member’s right to participate in the management and conduct of the business of the limited liability company is not community property. TEX. BUS. ORGS. CODE § 101.106(a-2).

II. Is Property Held by an LLC Community Property?

The general rule is that property held by a limited liability company is not community or separate property. See Mason v. Mason, 2019 Tex. App. LEXIS 3580, at *16 (Tex. App.—Austin 2019, no pet. h.). Because a limited liability company is a separate legal entity, property owned by a limited liability company is neither the community property nor separate property of its members. Id. at *9 (citing TEX. BUS. ORGS. CODE § 101.106(b) (“A member of a limited liability company does not have an interest in any specific property of the company.”). As such, property owned by an LLC is not subject to division between spouses during a divorce case.

III. An Exception to the General Rule About LLC Property

There is an exception to the general rule about LLC property. The doctrine of alter ego allows courts to set aside the corporate structure of a company to hold individual shareholders of a company liable for corporate debt. See Lifshutz v. Lifshutz, 61 S.W.3d 511, 516 (Tex. App.—Texarkana 2012, no pet.). This is also known as “piercing the corporate veil.” See id. The veil is pierced in limited circumstances: typically only when “individuals are using the corporate entity as a sham to perpetrate a fraud, to avoid personal liability, avoid the effect of a statute, or in a few other exceptional situations.” Id. (citing Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. App.—Fort Worth 1985, writ dism’d w.o.j.)).

Piercing the veil also plays a factor when LLC’s are involved in divorce cases. In divorce cases, piercing the veil allows a court to characterize corporate assets as community property, when it would otherwise be considered the separate property of one spouse. Id. As such, it is backwards from typical “veil-piercing;” as such, it is commonly referred to as reverse piercing. See id. Thus, if a limited liability company is being used to perpetuate fraud or avoid liability, reverse piercing can occur, and corporate assets can be characterized as community property and can be sold.

IV. Conclusion

Membership interests in limited liability companies are community property; generally, property possessed by those companies is not community property. However, bad behavior and fraud can change that. So, avoid those things at all costs to protect your LLC’s property.