One of the most difficult parts of a divorce is dividing assets between spouses. Texas follows community property rules, so the court tries to divide property fairly, though not always exactly 50/50. If the couple owns a business, its value may need to be figured out depending on when it was started.
This blog will explain how Texas laws affect business ownership in a divorce, how to figure out a business’s value, and how to protect your company.
The Role of Texas Community Property Laws During a Divorce
As mentioned, Texas abides by community property laws that seek to equitably divide assets between spouses. This considers each spouse’s income, work, and contributions to the marriage, as well as their usual lifestyle. If one spouse is much wealthier, the court will try to make the division fair.
Courts usually treat a business as marital, or community, property during a divorce. Couples may sell the business and split the profits, have one spouse buy out the other, or continue running it together. They must decide what works best under Texas Family Code, Chapters 3 and Chapter 7.
These laws explain what counts as community or separate property. Usually, things you owned before marriage—like businesses, homes, cars, or inheritances—stay with you. Exceptions are items you added your spouse to or bought with joint funds.
Texas community property laws try to divide property fairly between spouses by looking at income, work, and lifestyle.
When the Business Was Started Matters
If you created your company before you got married and kept it in your name, it is usually considered separate property. But your spouse could claim they helped the business grow by working in it or supporting it financially during the marriage. This could lead the court to classify the business as community property.
If you both started the company while married, it is almost always considered a community asset. You and your spouse must reach an agreement on dividing it fairly.
Valuing the Business
A business, whether separate or community property, must be valued by a professional to divide it fairly. A proper valuation makes sure one spouse does not get more than their share. Your divorce attorney can recommend a certified, independent appraiser to assess the business.
The appraiser will need documents like balance sheets and financial statements to review the company’s holdings. They examine the business structure, ownership, assets, and liabilities. The appraiser can determine a fair market value, which helps for dividing the business or deciding whether to sell it.
Another factor is if a separately owned business increased in value during the marriage. If so, the non-owning spouse may be entitled to part of the growth rather than the entire business’s worth. This can also apply if the family relies on the company’s income and the non-owner spouse does not work.
A proper business valuation ensures one spouse does not get more than their fair share.
Common Methods of Business Valuation in Texas
The specific details and type of business will influence how the appraiser determines its value. The Texas Comptroller of Public Accounts describes two common methods:
- Income-based: This method looks at the current and future income the business is expected to earn. It considers profits, growth potential, and financial stability to estimate the business’s value.
- Market-based: This method compares your business to similar companies that have recently sold in the market. It helps determine a fair value by looking at what buyers have paid for comparable businesses.
An appraiser may also use an asset-based approach by looking at the company’s books, but straight book value usually doesn’t show the full value. Instead, they often use the adjusted book value method, which lists assets and debts at their current market value.
Protecting Your Business With Marital Agreements
Even though no one likes to think about divorce before marriage, business owners should plan ahead to protect their company. This means talking with your future spouse about your business and making a prenup to protect both of you.
If you are already married and your business is growing, you can still create a postnuptial agreement. Either type of agreement can reduce worry and stress about what happens if the marriage ends. Couples can also use it to clarify ownership of other property, like jewelry, artwork, or vehicles brought into the marriage.
For the agreement to hold up in court, it must follow Texas Family Code, Chapter 4. Both spouses must sign freely and fully disclose all assets and debts. If a judge finds the agreement unfair to one party, it may not be enforced, so it’s important to work with an attorney. While not romantic, a marital agreement is a smart step that protects both spouses and simplifies future matters.
Marital agreements can reduce stress and protect both spouses’ interests in a business during a divorce.