How Property Division Affects Business Owners

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Divorced man and woman handling business and property division paperwork with their lawyer.
Property division can be complex, especially when handling a family owned business.

When a couple decides to move forward with a divorce, they will have to divide marital assets. For some Texas couples, this means figuring out what to do with a family-owned business. The process of dividing property in a divorce process can be complex. This is especially when there is a successful business at stake. When you know what to expect and how divorce property division can affect business owners, you can develop a strategy that will protect your long-term interests. 

Is A Business Considered Marital Property?

Texas courts consider a business that was started during the marriage or had marital funds invested as marital property.

If a spouse started the company before the marriage, the business may be considered separate property or non-marital property. This also applies if you started the business with funds that courts consider separate property such as inherited funds.

However, if you used marital assets to grow the business, for example by making financial contributions from marital funds that caused an increase in the value of the business, the legal issue becomes even more complicated. If both spouses contributed to the value of the business during the marriage, that can affect how the property is defined in a divorce. The business may be considered as marital property.

How Is A Business Divided In A Divorce?

Many couples find that the best way forward to work on a settlement agreement out of court. When working on a settlement, it is prudent to think about the long-term implications and potential tax consequences. Separating business and personal assets is a uniquely complicated process. This is especially when the business is the primary source of income for both parties. The court would require you to get a valuation of the company. 

Some issues that spouses need to consider include the following:

  • Are both spouses or only one spouse involved in operations?
  • Is it in the spouses’ interest to keep the business running after a divorce?
  • Will both spouses still need income from the company after a divorce?
  • Is there any premarital agreement that addresses the business in a divorce?
  • Do other parties have ownership?
  • Is there a legal agreement where other owners have the right to buy an ownership interest before a spouse can claim it in divorce?

The three main outcomes are for spouses to continue sharing ownership, one spouse to take ownership while compensating the other, or to sell the business and split the proceeds.

While this isn’t a popular way to handle a business during a divorce, you and your spouse could continue running operations together. The court will likely award a 50% business interest to each spouse.

What If Spouses Do Not Want To Co-Own Businesses?

If the couple can no longer continue to run operations together, one of the options is for one party to attempt to buy out the other party, especially in a small business. The court typically does not want to derail the growth of businesses by forcing the owners to split the business assets.

Buyout Or Promissory Note

The law does not treat the act of buying out a spouse due to divorce as a sale for tax purposes for the selling spouse. However, there could be tax implications for selling any part of the business interest to another party later on.

If you can’t make a lump-sum payment to buy out your spouse, you may reach an agreement through negotiations on spousal support, promissory notes or other types of arrangements. The key to reaching a satisfactory agreement is to think about what will work well and protect overall interests in the long-term. This includes setting aside temporary emotions to consider what makes the most sense.

For a small business, the court may also have the spouse who received the business assets to make payments of income equivalent to the amount of their community interest to the other spouse over time. The spouse would pay tax only on the interest received.

If you and your spouse are corporation business owners, one spouse may get ownership while selling the value of the stock owned by the other spouse.

Many spouses even opt to sell and divide the proceeds although it can take time to find a buyer.

When a Texas business owner goes through a divorce, he or she may want to seek help from an attorney. Property division can affect business owners significantly which makes it a difficult matter. However, it is possible to secure terms that allow for a strong and stable financial future. A business owner considering options may want to have their attorney evaluate his or her case. 

Valuation

Business owners will usually engage a professional appraiser to determine business valuation. The three generally accepted valuation methods are:

  • Market approach where valuers compare the business to another similar business sold recently
  • Income approach based on expected future income and cash flow
  • Asset approach based on assets and liabilities

As part of a divorce process, the judge will have to classify business goodwill into personal goodwill and enterprise goodwill. Personal goodwill is associated with the person running the business. One example is if one of the business owners has a strong reputation that drives a significant part of the business. The judge could deem there to be significant personal goodwill. The court will not split the value of personal goodwill.

Enterprise goodwill is associated with the company. The judge will split its value between the spouses.

Is My Wife Or Husband Entitled To Half My Business If We Divorce?

Your non-owner spouse may take half the value of your business earned during the marriage. Texas is a community property state. During divorce, there is an equitable distribution of community property earned by either spouse while you are married. You can make arguments for an unequal split. Even if you started your business before you got married, your spouse could claim the community property portion of your business.

If you run a small business with few assets or little revenue, you would most likely get the business while paying your spouse a share of the value.

Property division can significantly affect business owners. However, an experienced attorney or law firm can protect your rights and protect the business you’ve worked hard to build. Let the experts at Sean Lynch + Associates help you prepare your legal case. We have decades of experience in Texas state family law.

Contact us today for a no-cost case review.


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