Property division is often a complex and intensely contested issue during a divorce in Pennsylvania. Depending on the facts of your case, your limited liability company (LLC) may be treated as marital property under Pennsylvania law (§3501(a)). To protect your personal and business assets, you should retain the experienced Philadelphia divorce lawyers at At Schwartz, Fox, & Saltzman.
Generally, property acquired during a marriage qualifies for equitable distribution in Pennsylvania. This includes partial or sole proprietorship in an LLC, but there are exceptions including maintaining it as separate property from other marital assets.
This article discusses how a Pennsylvania divorce will impact any interest you hold in a limited liability company.
Limited Liability Company (LLC) Treatment in a Divorce
In a Pennsylvania divorce case, property acquired during a marriage is considered marital property. Under Pennsylvania law (§3502), only marital property is subject to being equitably, i.e., fairly, divided during a divorce. Accordingly, if you obtained an interest in an LLC or started a family business during your marriage, it will likely be treated as marital property.
When an LLC Member Gets a Divorce
A person who wholly or partially owns an LLC is known as a “member”. When a member of an LLC gets a divorce, their spouse may have a claim to the value of their ownership interest if it is classified as marital property. Whether a member’s interest is considered marital property depends on various factors.
Considerations for an LLC During a Divorce
If you have an ownership interest in an LLC and are going through a divorce in Pennsylvania, it may be classified as non-marital property and, therefore not subject to being equitably divided if you started the business before your marriage or inherited the company during your marriage. Be aware that even if the LLC was started before your marriage or if it was inherited, any increase in value of that LLC will be marital property, absent a pre- or post-nuptial agreement saying otherwise.
Does an LLC Protect Assets in a Divorce?
An LLC can protect business assets during a divorce. However, it does not protect a member’s interest, which is subject to being equitably divided. Additionally, if a member’s business interests in the LLC is a marital asset, it is generally not protected in a divorce. A properly drafted operating agreement in the LLC may prevent a spouse from gaining ownership in the LLC at divorce, however, the value of the divorcing spouse’s interest in the LLC may be marital property subject to division.
Types of LLCs & How They All Differ During a Divorce
There are several different types of LLCs in Pennsylvania. Specifically, LLCs can be organized as follows:
- Single Member – The LLC is owned by one person.
- Member Managed – The LLC is owned and run by multiple owners, and each person’s ownership and authority depend on the language of the operating agreement.
- Manager Managed – The LLC is owned by multiple members however, the members elected a manager to run the LLC.
- Restricted – Certain professions, e.g., lawyers, doctors, accountants, etc., which provide restricted services are required to operate as restricted LLCs if they are organized as an LLC.
- Benefit – The LLC is formed for the purpose of charitable activities.
While some LLCs cannot be divided, e.g., a restricted LLC, an LLC with a well-written operating agreement, the non-member spouse can receive a larger share of other marital assets or can receive financial payments from the member spouse, which represents the value of the member’s ownership in the LLC.
Can Your Ex Go After Your LLC?
In some cases, an ex-spouse may be able to go after an LLC during a divorce. This may be the case if the LLC was established during the marriage and the ex-spouse can show they contributed to the business or if the LLC’s assets were commingled with marital funds or marital assets. However, if the LLC was established before the marriage and kept separate from marital assets, it may be more difficult for an ex-spouse to claim a share of the business.
Summary of How LLCs Get Treated in a Divorce
In Pennsylvania, an LLC is generally subject to division in a divorce settlement if it was acquired during the marriage. Representation by a knowledgeable Philadelphia divorce attorney is necessary to find the exception to this rule to protect your business assets. Contact a Philadelphia divorce and family law attorneys at Schwartz, Fox, & Saltzman to learn how you can use our 40 years of experience in family law to your benefit.