Question: An Arizona resident in the process of getting a divorce wants to form an Arizona limited liability company. If he/she forms an Arizona LLC before his/her divorce is final, will the spouse own a community property interest in the new LLC?
Answer: It depends. Arizona law defines community property as all property acquired by either spouse during the marriage. There are two exceptions to this rule.
First, community property does not include property acquired during the marriage by gift or inheritance.
Second, community property does not include property acquired AFTER service of a petition for divorce, legal separation or annulment if the petition results in a decree of divorce, legal separation or annulment.
This means that if somebody gives money or property only to one spouse, the property is separate property unless the recipient changes the separate property to community property. Likewise, if a parent dies and leaves money or property to a married child, the money or property is separate property unless the recipient changes the separate property to community property.
Separate property can be changed to community property and community property can be changed to separate property. It is best to document changes in the character of property with a written document such as a deed. Married people who have separate property and who want to keep it as separate property must take care not to change the separate property into community property. Separate property can be changed to community property if it is titled in the name of both spouses, or if it is money, deposited in a joint bank account. Also, if community assets such as wages or salary are used to benefit separate property, it can cause some or all of the separate property to become community property. For example, if a man inherits a home from his parents and uses some of his salary, which is community property, to pay the mortgage or make improvements to the home, a part of the home will become community property.
Now, back to the question. If Spouse 1 is an Arizona resident and forms a new Arizona LLC after service of a petition for divorce on Spouse 2 and if the petition results in a decree of divorce, Spouse 1 is the sole owner of the interest in the LLC as separate property. Otherwise, Spouse 1’s interest in the LLC is deemed to be community property.
I recommend that an Arizona resident who is married and wants to ensure that he or she will be the sole owner of an interest in a new Arizona LLC should not rely on the divorce becoming final, but should get the non-owner spouse to sign a document in which the non-owner spouse disclaims any interest in the LLC. Of course, if the non-owner spouse will not sign the disclaimer, the divorce must become final for the owner spouse to own one hundred percent of the new LLC.