When one or both spouses own business interests, it can turn the property division portion of divorce into a complex and confusing process. Texas is a community property state, which means that all property – including the assets of a business – that was obtained or created during a marriage is subject to property division in the event of a divorce. While each situation is unique, property division for business owners starts with a characterization of the business as either separate or community property.
In determining whether a business is separate or community property for purposes of property division in divorce, courts will look to the date of the marriage and the date the business was founded, the type and source of funds used to start and run the business, and the contributions of each spouse to the business during the marriage. When dividing a business, the date of its inception and the type and size of the business will factor into how a court will treat it during divorce and property division. The three most common scenarios are:
- The business was founded prior to marriage by only one spouse: Generally, if a company is created prior to marriage, it remains that spouse’s separate property and won’t be subject to a division of assets. However, even a separate property business may have community property components if joint funds are invested or used, the business appreciates in value during the marriage, and if the non-owner spouse contributes to the business’ success. In short, despite a business being separate property, assets, and income acquired from the business while married will likely be considered community property.
- Business is jointly owned by both spouses or both spouses are involved in the business: When both parties own and/or are involved in the success of a business jointly, the court will endeavor to reasonably divide all assets so as to avoid destroying the business. While some ex-spouses can choose to continue running a business together after a divorce, a Texas family court will not proscribe that absent an express statement of intent by both parties. Co-ownership allows both parties to continue to own a business after a divorce.
- In Texas, a business started during the marriage with joint funds is community property owned equally by the spouses.
Parties involved in high net worth divorces may have a jointly owned business, a family business, or a closely held business. If this is the case, a business valuation expert, as well as a forensic accountant, will likely need to audit these assets, including income tax returns and more details to be obtained during the discovery process.
Providing Options for Business Owners
The type of business you own matters. If you own a large corporation, the court may suggest a division of stock so you can retain control of the business without it being disrupted. If the company is publicly traded, the division is less complicated since the publicly traded stock is valued on the exchange. Since the ownership of that stock doesn’t require any interaction between former spouses, the court can just divide the stock.
Some businesses, however, are governed by special regulations like a franchise or require a license to operate like a law practice or medical practice, which will change how the court addresses them with regard to property division. To wit, a non-professional can’t own a part of a professional practice – a medical practice can’t be owned even in part by someone who is not a doctor.
A sole proprietorship will be considered in its entirety in a divorce, but for a partnership, only the percentage owned by you or your spouse would be divided. Partnership agreements may limit the transferability of an interest in a company to a spouse during a divorce. They can also fix the value of one partner’s interest in the entity and allow the business to be bought by the other partners in the event of divorce.
The property division component of divorce proceedings is often the most hotly contested portion of ending a marriage, and adding a valuable business into that already charged environment can make for a stressful and agonizing process. While valuing a business and potentially dividing sounds complex and definitely can be, there are a variety of options for business owners, including:
- Buying out the other spouse, taking full ownership of the business moving forward
- Selling the entire business splitting the proceeds
- Agreeing to continue to work together in the business after the divorce
- Dividing the business into two separate entities if possible
- Dissolving the business entirely
Counseling Clients on Handling a Business in a Divorce
As one can see, Texas courts can divide business assets in a divorce in a variety of ways depending on the circumstances and the parties’ desires. Each case is unique and comes with its own complications, so it is important to meet with an experienced Texas divorce attorney who has experience valuing and dividing business assets during the divorce process. Terry & Roberts’ legal team has experience representing clients in divorce proceedings involving various types of business entities and assets. Our attorneys have extensive experience helping clients navigate complex property division cases. We’ll help you protect your business and pursue an ideal outcome in your property division case by reviewing your circumstances and advising you on the best approach to preserving your business’ value while ending your marriage as peacefully as possible.