Divorce is far from rare.
The Texas Department of Health Services reports that there are more than 75,000 divorces in the state each year.
Despite being relatively common, going through a marital separation is never easy for the couple that is involved in it. Every couple has its own unique set of challenges that must be overcome.
For business owners, divorce can be especially complicated. Simply put, dividing a business in a divorce is hard. It is crucial that business owners take action to protect both their personal financial interests and the health and viability of the company.
It is imperative that business owners consult with a top Texas divorce attorney who has relevant experience.
Three Steps for Business Owners Going Through a Divorce in Texas
Step 1: Determine if the Business is Community Property or Separate Property
In dealing with business and divorce, the very first thing that you need to do is to determine if your business interests qualify as separate property or as community property for the purposes of Texas law.
Under Texas law (Texas Family Code Sec. 3.001), separate property is property that was owned or claimed by a spouse prior to the start of their marriage. Community property (joint property) is all of the property that was obtained or claimed after the start of the marriage.
With limited exceptions, separate property generally stays with the original owner. In other words, separate property is not subject to the asset division. That being said, each spouse will have an equal claim to the value of the community property.
Step 2: There Must Be a Comprehensive Business Valuation
To deal with property in a divorce, you need to know the fair market value of the asset. Early on in your divorce case, it is highly recommended that you get a comprehensive valuation of your business interests. This is especially important if your business is community property.
Make sure that the true value of the business is taken into consideration, with all assets and liabilities being fully accounted for.
It should be noted that the increase in value of a business can sometimes qualify as community property even if the business itself is separate property. For example, if one partner brought a $100,000 business into their marriage, that business is separate property. If ten years later — when they get divorced — the business is worth $150,000, a portion of that increase might qualify as community property. This is a simplified example, and a number of different factors will affect this type of determination.
Step 3: Business Owners Should Clarify their Objectives
To get to the desired result in a family law case, you first have to know exactly where you are going. In complex property division cases, you are not going to stumble into success; there are simply too many things that can go wrong. When determining how you should handle your business in your divorce, you need to clarify your desired outcome.
Business owners have four basic choices:
- Buy your spouse out of the business, thereby taking full control of your collective business interests going forward.
- Try to cash out of the business, thereby letting your spouse take full control over your shares of the company.
- Sell the entire business with your spouse, splitting up the proceeds.
- Agree to work with your spouse, each keeping an ownership share in the company.
What is the best option in your case? It depends on a wide range of different factors — from your current financial status and your desire to stay in the company to your ability to get along with your former partner.
You should obtain professional guidance. Not only will your divorce lawyer be able to help you assess the benefits and drawbacks of each option, but he or she will also be able to help you take action to achieve your goals.
Keys to Evaluating the Business
Before you can determine how you can divide your business, evaluate your business.
A company is an asset. Figuring out how to share it is based on the same two-step process applied to any other marital asset—characterization and valuation.
- Characterization – This means determining what type of asset the business is. Is it community property that is jointly owned, or is it a separate property that is your asset and not subject to division upon divorce, or is it some combination of each?
- Valuation – This means determining what the business is worth. Valuing a business is a complex process where a financial expert reviews records relating to the entity’s income, assets, expenses, liabilities, and expected future income to determine the value of the business.
These evaluations will determine if your spouse is entitled to part of the business, and if so, how much. Knowing this fact can cause panicked business owners to take foolish steps in an attempt to make the business look less valuable and profitable. Don’t do it! The best thing you can do is research family law lawyers and choose one that knows about both divorce and business law.
Three Methods for Dividing a Business in a Texas Divorce
Business owners face unique challenges when going through a divorce. For those who own a business, there may be concern about if and how the company will be divided. Is the former spouse entitled to half of the business?
In the end, if the business is determined to be either full or partial community property, it will have to be divided to compensate both parties. There are three main methods the courts use to divide a business.
1. One Party Gets the Business and the Other Gets Financial Compensation
This is the method that is used most often to divide a business. In these cases, the spouse who has greater involvement in the business will be awarded the business itself.
For example, if you own a law or medical practice, a court is likely going to award you 100% of the business because the business is essential to your livelihood and your spouse is not qualified to run such a business. Your spouse will receive compensation based on the characterization of the business and its valuation.
To illustrate, if your interest in the business is valued at $100,000 and you are awarded the entirety of the business, then the court will compensate your spouse for her interest in the business–$50,000 assuming a 50-50 division—by awarding her some other martial asset of comparable value (a retirement account, perhaps). Or, in the absence of some other marital asset of comparable value, she may get a $50,000 money judgment in her favor that you will have to pay her according to specified terms (monthly payments over a number of months or years).
The characterization process determines how much of the business is community property so it can be split fairly. Characterization will take into account whether you acquired the business before your marriage or after.
- If the business predates the marriage, divorce lawyers and valuation experts will consider the value of the business at the time of the marriage, how long before marriage the business started, and how the business has performed since the marriage. Even if it is determined that the business is your separate property, income from separate property is still considered community property.
- If the business has been passed down by a family member, divorce lawyers and valuation experts will consider things such as whether it was a gift or purchase, what percentage of the business you own, and whether others maintain ownership interests.
- If you own the business with a business partner, divorce lawyers and valuation experts will separate what you own from what your partner owns.
As you can see, each scenario is different so divorce lawyers and valuation experts will take into account the unique circumstances of your business. Using these facts, characterization and valuation will be determined, and fair financial compensation to the spouse will be awarded
2. The Business Is Sold, and the Proceeds From the Sale Are Divided
This scenario happens sometimes, but it is not at all as common as the first scenario. Typically a business is sold if there isn’t agreement about who should be awarded the business.
For example, in some cases, both spouses may be entitled to the business, but neither wants to claim ownership. In other cases, both spouses want the business, but the business doesn’t generate enough income to provide fair compensation to the spouse who does not get the business.
Selling the business can be difficult because it can often take months to find a buyer.
However, divorce lawyers say in some cases, selling the business is a good idea. It allows each party to gain profit from the sale, and then each can use that profit to set up their own businesses once the divorce is finalized.
3. The Business Continues to Be Jointly Owned and Operated by Both Parties
Co-ownership is the final way of dividing a business after a divorce. It is rare for obvious reasons – two people who no longer want to be married and live together rarely want to continue working together as business partners.
That said, in rare cases co-ownership can work out. For the court to decide that joint ownership is the best solution, both parties must:
- want the business,
- demonstrate that they play a crucial role in running the business and making it successful,
- and they must also show they can work together in the future as business partners.
Central to determining the value of a business and how a business is divided is the form of business—is it a corporation, partnership, or sole proprietorship?
Partnership property is owned by the partnership entity, not the individual partners and is, therefore, neither separate nor community in character.
The only partnership property right the partner has which is subject to a community or separate property characterization is his interest in the partnership—his right to receive a share of the partnership profits and surplus.
Distributions of the partner’s share of profits and surplus (income) received during marriage are community property even if the partner’s interest in the partnership is separate property.
Similar to a partnership, property owned by a corporation is neither separate nor community property. A court may only award a spouse’s interest in the corporation.
If the business is a sole proprietorship established during the marriage, then all of the business assets are considered community property.
Get Help From Our Texas Divorce Lawyer Today
At the Law Office of Ben Carrasco PLLC, our Austin, TX divorce lawyer has deep experience representing business owners in divorce. If you are getting divorced and you own a company, or your spouse owns a company, you need a top-rated legal advocate by your side.
To arrange a fully confidential, no obligation legal consultation, please contact our law firm at (512) 320-9126. From our law office in the heart of Austin, we serve business owners throughout the region, including in Travis County, Williamson County, Burnet County, and Bastrop County.