It takes a lot of blood, sweat, and tears to run a successful business, big or small. Building a business can take years or even decades—which is why the prospect of losing it all during a divorce can be so devastating for business owners.
The property division process is one of the most complicated (and frequently, the most contentious) aspects of any divorce. How you handle property division as a business owner can determine whether you retain control of your enterprise post-divorce, and if so, how much. To that end, understanding how the court will handle your business during your divorce—and the possible outcomes you face—can help you make the best choices for your business moving forward.
At Coker, Robb & Cannon, Family Lawyers, 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.
To schedule a consultation with our team or learn more about our services, contact us online or via phone at (940) 293-2313.
First Things First: Understanding Equitable Distribution
When you're married, you (and your spouse) own two types of property:
- Separate property. Separate property consists of assets and liabilities you either acquired before your marriage, or things you acquired while married by gift or inheritance. For example, if a relative gifts you a guitar for your birthday, that may be considered separate property, even if you're married when you receive it.
- Community property. Community property consists of assets you and your spouse acquired while married.
Separate property can become commingled with community property during the course of the marriage, causing tracing the separate property assets can prove expensive and costly unless otherwise specified in a document like a prenuptial or postnuptial agreement.
When you go through property division in Texas, you retain your separate property. However, you must divide your community property (assets and liabilities) equitably with your spouse.
An equitable division of property does not mean a 50/50 split between the parties. The Court’s goal is to make a “just and right division.” To achieve that goal, the court may award one party a greater share of the community property.
If you want to avoid a court ruling in your property division case, you must agree on terms for your property division with your spouse. If you cannot agree, the court will decide how to distribute your community property based on evidence both parties provide in a trial.
The court can consider the following factors, among others, during property division disputes:
- Each party's age and health. If one party is physically or mentally unwell, elderly, or suffers from other age or health-related difficulties, the court may consider that when distributing property.
- Each party's education and earning power. If one spouse has a career with a positive, high-earning trajectory, the court may factor that into how it handles property division. The lower-earning party may receive a greater share of the community property under the assumption the higher-earning party can recoup losses easily.
- Each party's separate assets and liabilities. The court can also weigh the amount of your separate property during deliberations.
In situations where children factor into the divorce, the court may also consider the child custody arrangement during property division. For example, if one parent has sole custody of the children, the court may award them the marital home to make caring for the children easier.
Is My Business Separate or Community Property?
As you can probably imagine, deciding whether a business is separate or community property is challenging, especially if the business was created during the marriage.
If you founded your business pre-marriage, then chances are the business itself and whatever assets or income you acquired pre-marriage are separate property. However, assets and income acquired from the business while married will probably be considered community property. If you expanded the business using community property funds or took steps that may be considered as “gifting” part of the business to your spouse, it could be argued that some or all of the business is now community property or belongs partly to your spouse.
If your spouse actually contributes to the business itself in some way (donating money to or working for the business, for example), your spouse may claim a community property reimbursement from the business. In short, the more involved your spouse is (or was) with your business, and the more community property you might have invested into it, the more difficult it will be to claim the business as your separate property.
As soon as you know you're headed towards a property division dispute, you should hire a lawyer who's familiar with Texas property division laws for your case. They can help you understand how the court will see your business and prepare for the property division process.
The type of business you own plays a central role in the property division process. For example, if you own a large corporation, the court may ask you to divide stocks with your spouse, while allowing you to retain control of the actual business entity. If you own a business with special regulations (like a franchise) or one that requires a license to operate (like a medical practice), that will also change how the court handles your case. A sole proprietorship would be entirely considered in the divorce, whereas with a partnership, only the percentage owned by you or your spouse would be divided.
My Business (or Its Assets & Income) Are Community Property, what Happens Next?
As you enter the property division process, the first thing you and your spouse need to do is to evaluate how much the business is worth. One or both parties can hire a financial professional specializing in business and asset valuation for this process. You can then use the information from the professional to determine the value of your business with your spouse. Parties can also agree on a value of the business based on known information, without obtaining a formal business valuation.
Once you determine how much your business is worth, and what percentage of it should be divided in the divorce, you have several options:
- Award your spouse a percentage value of the business in income or assets. In situations where a spouse has little or no involvement in the actual business, their spouse can simply award them a percentage of the assets or income from the business while retaining control of the business entity.
- Buy out your spouse. If your spouse owns a percentage of the business, it may be possible to buy them out by offering them assets equal to their ownership percentage. This can be a good option if you own a majority of the business or want to retain control of it and have the assets to spare.
- Pursue joint ownership. If you're on good terms with your soon-to-be-ex and you each own a significant percentage of the business, joint ownership may be a good option for you. Obviously, this depends on whether you can maintain a functional working relationship with your ex post-divorce.
- Divide the business. If joint ownership isn't an option, you can choose to divide the business into two separate entities. Business division comes with its own difficulties—you may need to rebrand, and if your business occupied a niche, you're essentially just creating more competition. However, it can be a good option in some situations.
- Sell the business. Alternatively, you and your spouse can sell the business and divide whatever profits you make from the sale. Selling a business can be difficult, but it's a good option if you can't reach an agreement with your spouse and don't want to lose your investment in your business.
- Dissolve the business. Last but not least, if you can't reach any sort of agreement with your spouse, you can choose to dissolve the business completely. Dissolving the business is typically a worst-case scenario, since you can't reap the rewards of your labor if you dissolve the business. However, in some divorces, it's the only viable option.
An attorney can help you identify the best path forward in your property division dispute and build a strong case that helps you protect your business during and after your divorce.
At Coker, Robb & Cannon, Family Lawyers, we know how much your business means to you. We're committed to relentlessly advocating for your rights and best interests in your property division case.
To schedule a consultation with our team or discuss your case with us in more detail, contact us online or via phone at (940) 293-2313.