Divorce is hard enough, but throw in a family business, and all of a sudden, it gets complicated on both financial and emotional levels. How the business is classified, valued, and divided is not only important to its future but can determine your ex-spouse’s future financial well-being, and your own. Since Texas is a community property state, there are many factors to consider when determining how much of your business your spouse is entitled to receive in a divorce.
About Stange Law Firm
Stange Law Firm Texas family law attorneys understand the unique challenges business owners face in high asset divorces. At the heart of our practice is a keen awareness of the complex intersection between community property issues, valuation disputes, and business continuity.
From coordinating forensic accounting reviews to negotiating favorable settlements and advocating in court, we are committed to helping entrepreneurs not only protect their businesses but also secure a just and equitable resolution in their divorce.
Relevant Texas Law
The marriage rate in Texas is 5.8 per 1,000, with a divorce rate of 2.1 per 1,000, many of these involving businesses. Texas is a community property state, meaning that anything acquired during the marriage, including a business, income earned, and any increase in value, is presumed to be 50/50 unless there is a clear reason why not.
The hard part for a business owner is that the court will consider how the business was operated during the marriage, not just at the time of its creation. How the business was treated during the marriage, including which funds were used to pay for the business and whether the non-owner spouse contributed to it, will ultimately affect whether any of the business’s value is subject to division with the non-owner spouse, and how much.
Separate vs. Community Property
The first step toward dividing a business in a Texas divorce is characterization. You must determine whether the business is separate or community property. Assets owned before marriage or acquired by gift or inheritance may be characterized as separate under the Texas Family Code.
Even if a business is separate property, its value may be affected by the efforts of both spouses during the marriage. For example, if marital funds were used to improve the business, or if the non-owning spouse contributed labor or skills to the business, some or all of the increased value may be characterized as community.
Because all property is community property unless proven otherwise, the burden is on the business‑owning spouse to show “clear and convincing evidence” that the business is separate or partly separate. This means keeping meticulous records of how and when funds enter the business, and of personal contributions.
Options for Dividing the Business
There are several typical methods used by Texas courts or divorcing spouses to settle a business’s future when it is determined to be community property or to have community value:
- Buyout. When one spouse purchases the other’s stake in the company. This often occurs when one spouse is willing to be bought out and the business owner wishes to maintain control.
- Offset. You use other marital assets to compensate the non-owning spouse rather than giving them a share of the company. This can include cash or investments.
- Co-ownership. Both partners retain their ownership stakes, but this can present challenges for future expansion, management, and control.
- Sell. Although this is frequently a last resort, particularly if the company has long-term strategic value to one or both spouses, the business is sold, and the proceeds are split between the spouses.
Given the emotional and financial issues at stake, it is not uncommon for divorce settlements involving a business to also feature a post-divorce agreement concerning, for example, how the business is to be operated, how future profits are to be shared, or how a later buyout is to take place if one spouse elects to exit.
FAQs
Q: Is My Business Automatically Community Property in a Texas Divorce?
A: Your business is not necessarily automatically considered community property in a Texas divorce. The Texas Family Code § 3.002 presumes that property acquired during marriage is community property. However, the business may have been started before marriage or received as a gift or inheritance, which may make it separate property.
Q: What Happens if I Used Marital Funds to Fund My Business?
A: If you used marital funds to fund your business, it will likely be considered community property and subject to division in a divorce. This means that your spouse may be entitled to a portion of the business, particularly the portion that you used to help fund the business. A lawyer can help you understand what parts of your business may be subject to division in the event of a divorce.
Q: How Do Courts Value a Business in a Divorce?
A: Courts typically call upon a forensic accountant to utilize one or more valuation methods (income-based, market-based, or asset-based) to arrive at the value of the business. Financial statements, tax returns, debts, assets, and anticipated earnings are all considered. Since Texas is a community-property state, the court determines how much of the business is community property and therefore available for division.
Q: Can I Keep My Business After a Divorce?
A: Yes, you can keep your business after a divorce. Business owners often retain their company through a negotiated buyout, in which they transfer a greater portion of other marital assets in return for full ownership. Some couples also opt for co-ownership when they believe they can work together after the divorce, or they may sell the business entirely and divide the proceeds.
Contact Us Today
Business division is a complex part of divorces. It is often difficult to know what parts of the business should be divided, if any, and what steps to take regarding the business following the divorce if your spouse was involved. However, an attorney at Stange Law Firm understands Texas law and can help you understand your rights and options. Contact us today to get started.