Divorcing When You Own a Small Business

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by | Jun 6, 2022

Getting divorced can be complicated. Divorcing when you own a business together is even more complex. Hiring an educated and experienced divorce attorney is the first step when it comes to divorcing when you own a business. Their legal advice and expertise make them a crucial part of your legal team. Their goal is to act in your best interests, especially when you want to protect your business and protect yourself both during and after the divorce proceedings.

According to the Texas Department of Health Services, there are over 75,000 divorces in the state of Texas yearly. In addition, the state of Texas is home to over 2.8 million small businesses. Each Texas divorce has its own set of unique circumstances. As a result, every business owner divorce in Texas requires experience, understanding, and a personalized strategy.

How to Protect Yourself in Divorce Involving a Business

Before we get into how to protect yourself and your business, it’s important to have a solid understanding of how the state of Texas views property. There are two main categories:

  1. Separate Property – Property you acquired prior to marriage or property that was given to you personally as a gift or inheritance.
  2. Community Property – Property acquired during the marriage, including income generated from separate property during the marriage.

Texas is considered a community property state. This means that any property acquired during the course of the marriage is considered community property.

The Texas court will seek to provide just and right property division for the divorcing couple. This may not always align with your idea of a fair and equal division. The court’s goal is to determine what is most equitable or fair to both parties. If your business is separate property, then you need evidence to prove it. This is called rebutting the presumption of community property.

How Courts Decide What to Do with a Business

Texas courts will attempt to split all property (including a business) in a just and right way. To do this, the court needs to first determine if the business is separate or community property. The court will also need to determine the value of the business.

In order to determine the value of a business, the business must undergo evaluation from a financial expert. They will review the business’s assets, profits, liabilities, projections, expenses, and more. The court will then determine how much of the business each spouse is entitled to. It’s important to understand that this may not be an even split. The court will also put the business through a valuation. There are a variety of ways the court may do this.

The business must also be characterized by clear and convincing evidence if it is separate or community property. If you can prove that the business is only yours in a way that satisfies the court, then it will not be divided.

What is Property Valuation for a Business?

A business valuation is more than just deciding on the value of the business’s physical assets. It’s the process of determining the value of the business as a whole. While it does take tangible assets into account, it also considers things such as goodwill.

For example, personal goodwill is one person’s ability to bring in new customers and retain existing customers because of skill and reputation. Enterprise goodwill belongs to the business and adds value to the property. However, personal goodwill belongs to the individual and does not count as community property.

Business valuations are generally conducted by a Certified Public Accountant with accreditation in business valuations or a business appraiser. In either case, it’s important that they have experience with Texas divorce law or work closely with your legal team during the course of your divorce.

Dividing the Business

Business division can occur in a few different ways. If the couple isn’t able to agree through divorce mediation, then the court may decide that one person retains the business while the other is financially compensated. Most people go this route and the spouse who is more involved in the business generally keeps it while buying out the other spouse. Occasionally the spouse being bought out will get other assets instead of cash payments.

In other cases, the court may order recurring payments from the spouse retaining the business until the financial agreement to buy out the other spouse has been fulfilled. Another option is selling the business and splitting the proceeds. Remember that just because you sell the business, the proceeds may not be divided equally, you or your spouse may receive a higher or lower percentage. If the business cannot or should not be given to one person, sold, or split, then you have the option of continuing to operate the business as joint business owners.

However, this option can hold the potential for many complications. The court must agree that this is in the best interest of the business and the divorced couple must convince the judge that they’ll continue to be involved for the benefit of the business, that they can work together well, and that they both want to keep the business running. Of course, if you signed a prenuptial agreement prior to the marriage or a postnuptial agreement after the marriage, then this will play a major role in the divorce.

Business and Divorce

It’s key to remember that Texas is a community property state. Keep clear records of all property you were gifted or inherited to prove ownership. Don’t mix funds when it comes to personal accounts and business accounts unless you’re okay with the money and property being treated as community property should you divorce. Also, recognize that the court’s duty is to oversee fair property division, not equal property division.

If you find yourself in need of a Texas divorce lawyer, reach out to the professionals at The Jimenez Law Firm. We’re experienced and take your rights seriously. We can provide guidance through your divorce, with the division of assets including business assets, child support, child custody, spousal maintenance (alimony), and more.

Call the professional legal team at The Jimenez Law Firm today at (214) 513-0125 to learn more about how we can help you with your divorce.

 

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