Updated on August 22, 2022
It takes a lot of time, effort, and money to build and run a business, which is why the mere thought of losing your business to your spouse upon divorce may seem so frustrating and devastating.
Every divorcing couple faces their share of difficulties, but if you own a business, things are much more complicated. Every divorce is as unique as the couple involved, but there are some basics related to owning a business that can help you understand how best to proceed.
Running a business requires careful strategizing, and protecting your business in a divorce does as well. A Waco divorce lawyer will protect your rights and interests and help you make an informed decision about your business during your divorce case.
Separate vs. Community Property in Texas Property Division Disputes
In order to determine if your spouse can get half of your business upon divorce, it is important to understand property division laws in Texas. Unlike most other states, Texas is a community property state. This means that your property during a marriage can be split into two categories:
Separate property is any property you owned and acquired before your marriage and kept separate throughout. Under Texas law, gifts and inheritances either of you acquired in your name alone during your marriage are also considered separate property.
Separate property may lose its “separate” status if the assets become commingled (mixed) with community property during the marriage.
Community property is any type of property—assets and liabilities—you and your spouse have acquired during the marriage. This is regardless of who made the purchase or whose name is on the title. The only exceptions are gifts and inheritances received by either spouse while married.
At the time of divorce, all property is presumed to be marital property unless you have clear and convincing evidence to the contrary.
When spouses file for divorce, each party will retain their own separate property, while community property will be divided between the parties in a “just and equitable” manner, which means fairly in relation to the circumstances involved.
The Equitable Division of Property in Texas
Texas is a community property state under Texas Family Code § 3.002. This means that all community property of a married couple must be split between the spouses in a just and equitable manner upon a divorce.
While “just and equitable” often results in a 50/50 split, the community property may not always be divided equally. If equitable is not “equal,” then what is it? Essentially, equitable means fair and just. In essence, this means your marital property will be divided in a manner that is considered fair, given the circumstances.
In order to divide community property equitably, Texas courts consider these factors and others for each spouse:
Current employment and work history
Contributions to the marriage
Separate assets and liabilities
The current child custody arrangement if the couple has children
You may not have to go to court to divide your property, including your business, if you and your spouse agree on all of the terms of your property and debt division. It is advisable to seek help from an experienced Waco divorce attorney to help you negotiate property division with your spouse.
If Your Business Is Separate Property
Finally, we get to one of the main questions, “Is business considered separate or community property?” Unfortunately, there is no straightforward answer to that question.
It is difficult to classify a business as community or separate property, especially if it was created by one of the spouses during the marriage. Generally, if you created and ran your business before your marriage and you kept it strictly separate throughout, your business will likely not be subject to property division.
Further, if you addressed separate ownership of your business in a valid legal contract, such as in a prenuptial or postnuptial agreement, the separate nature of your small business may also be protected.
If one of you brought the business in question into the marriage with you, but it was intermingled with your marital property, it can complicate the matter.
The burden of proving that an asset such as a business is separate property is on the spouse who makes the claim. Speak with an attorney to determine if your business is community or separate property in your particular situation.
Tips to Keep Your Business Separate Property
The mere thought that your spouse could get half of your business when you file for divorce can be very unpleasant. Is there anything you can do to protect your business from your spouse when filing for divorce?
Fortunately, it is possible to take certain steps before and during the marriage to protect your business in the event of a divorce. Contact a Waco divorce lawyer to help you protect your business interests and legal rights.
Create a Prenuptial or Postnuptial Agreement
Effecting a prenuptial or post-nuptial agreement can help distinguish between separate and community property to protect assets in a divorce. An agreement of this nature can pinpoint your business as your own property, which means you won’t have to defeat the presumption of community property in the event of divorce.
If you are a sole proprietor and are considering incorporating, it is important to carefully consider the possible consequences. The stock created by incorporation would likely be considered community property in a divorce. Implementing a postnuptial agreement can help offset these consequences.
It is recommended to seek the legal counsel of an experienced attorney to help you draft a valid and enforceable prenup or postnup in order to protect your business and other assets. If a divorce is already on the horizon, however, you have probably moved past the point where a postnuptial agreement could be useful.
Beware of Your Spouse’s Contributions
If the non-owner spouse worked for and helped grow the business during your marriage, it can make it more difficult to maintain the business’s separate nature, even if you owned your business before the marriage.
Unless you have absolutely no choice, try your best to keep your spouse out of business operations if you want to protect your business in the event of a divorce.
Keep Accurate and Precise Records
Running a business is a lot of work, and keeping your books organized is an important component of that work.
When complicated property, such as a business, is contested during a divorce, successful settlement is very likely to hinge upon you having kept excellent records. When you keep your records up to date and exact, they tell a financial story that is difficult to refute.
Avoid Funneling Expenses through the Business
There are a variety of legitimate business expenses that naturally go through your business. The following expenses (and many others) are IRS-approved business expenses in some situations:
Your smartphone bills
Your fuel bills
A percentage of your mortgage
If you are going through a divorce, however, this practice can work against you. If you are running all of your expenses through your business, it can inflate your income artificially, which is not only a tax issue but can also lead to you owing more in terms of child support or spousal maintenance.
Keeping your business expenses and personal expenses carefully separated will help to keep your divorce finances clean.
Don’t Commingle Marital and Business Finances
One way to confuse the issue of your business finances—and thus your business’ value—is to commingle business funds with marital funds. If the business is your separate property, intermingling finances can blur the legal line that distinguishes your business from community property.
Pay Yourself a Fair Salary
Failure to pay yourself for running the business can decrease your family’s financial status and tip the balance from separate to marital property.
If the business owner among you ran the business but failed to pay himself or herself a reasonable wage, the marital estate could maintain a claim on the time, toil, finances, and effort put into the business, which would have enhanced the business owner’s separate property.
If Your Business Is Community Property
If you came into the marriage with a business in tow—or your spouse did—you may think that the matter is settled, but, as with nearly every element of divorce, it’s far more complicated than that.
For example, if the business morphed into a family business that you and your spouse both helped run, it is very likely no longer considered separate property. (A business must remain separate throughout the marriage in order to retain this classification).
Even if the business was kept carefully separate throughout your marriage, any increase in value—which is exceptionally common—is very likely marital property that will need to be divided equitably upon your divorce.
However, if you started a business while married, it would most likely be considered community property. As a result, any income from your business will be divided between you and your spouse if you get divorced.
In fact, your spouse may even be entitled to half of your business if the court considers such division to be equitable and fair. If any of the following situations are true, your spouse is most likely entitled to a portion of your business:
You founded your business while married.
You built or expanded your business using marital funds.
Your spouse contributed to your business in any way (e.g., he or she donated money, served as a manager or business partner, or worked in any other capacity).
Ideally, you and your spouse should reach an agreement regarding the division of your business and other assets outside of court. If your attorney determines that your business is a community property that must be divided in a divorce, ask yourself the following questions to determine the most appropriate resolution:
Has your spouse contributed to the business in any way?
Would the business still be profitable if you changed its structure?
Would it be possible to continue operating your business after the divorce?
Is there a possibility of selling the business to divide the proceeds?
Is it possible to give up your other assets in exchange for your spouse’s share in the business?
Does your prenuptial or postnuptial agreement address the ownership of your business?
Are any other people involved in the management or ownership of the business?
Is there a buy-sell agreement that requires you to sell your spouse’s interest in the business to the other owners?
Would it be possible to buy out your spouse’s interest in the business?
Is it possible to resolve your dispute amicably with the help of an attorney?
Obtaining a Business Valuation
Even small businesses can be financially complicated. If your spouse has more to do with your shared business’s finances than you do, it can leave you vulnerable to financial shenanigans.
The best way to ensure that you obtain a fair division of marital property is to obtain a solid business valuation from a reputable source. This will help you determine the business’ worth from a variety of perspectives, including its projected earnings into the future.
You will need a business valuation in order to help ensure that your financial rights are protected and that you receive an equitable division of your marital assets. Your options here include the following:
Agreeing to hire a business valuator whose final valuation you will both accept
Hiring separate business valuators and rectifying any differences in value that arise
Putting a meaningful value on a business can be very difficult and can easily become a sticking point in your divorce. Each business must be evaluated on its own unique merits, and the process is usually exacting.
If you and your divorcing spouse can come to a mutually acceptable decision regarding who will conduct the valuation, you can move forward with the outcome of that valuation.
If you and your divorcing spouse obtain your own separate valuations, the outcomes should be in fairly close alignment. If they are not, however, the court will make its own determination based on the valuations you make available. This can be a complicated process that requires very careful attention.
Several basic approaches can be employed to help assign a value to a business in divorce (based on the kind of business and the current market):
There are many ways to value a business, but one of the most commonly used in divorce situations is the fair market value. The market approach compares available market studies of recent sales in your area involving similar businesses.
If your business is quite unique, however, the market approach can be quite nebulous. There is no other business out there that is exactly like yours, making it challenging to compare selling prices.
An asset approach, rather than comparing market values, tallies and totals the assets that make up your business. This includes assigning a value to tangibles such as your inventory, equipment, and other assets—but also takes your company’s name and brand recognition in the community into consideration.
Income Valuation Approach
In this approach, the income your business generates over a specific period of time will be implemented to calculate the projected value of your business.
While determining the value of your business for divorce is critical, it can also be exceptionally complicated. For example, there is the value of the business to you and your personal finances (which might go beyond what its value on the market might be).
If you have poured your time and effort into the business and it is also your source of income, walking away can have far more financial consequences than your equitable share in the business’s value can make up for.
Further, if one of you ran the business and worked there every day while the other played little to no role in running the enterprise, the judge may factor this sweat equity into his or her calculation of your business’ value.
Ultimately, deciding who will continue running the business and who will walk away—if you do not sell it—can be one of the most challenging divorce decisions of all.
However, if you and your spouse know how much your business is worth, you can agree on a predetermined value without requesting a business valuation. Once you know your business’s value, you need to decide how to “divide” the business in a divorce.
Given that your spouse could claim a portion of your business in a Texas divorce, it is critical to contact a skilled attorney as soon as you know that your marriage is headed for divorce, especially if you and your spouse cannot reach an agreement on property division.
Protecting Your Business
If you and your spouse run the business in question together, dividing the asset in your divorce is going to be tricky. Such a business is often the sole source of financial support for the entire family, which typically means that selling it in the course of your divorce will be financially detrimental for all involved.
Splitting a business down the middle is rarely a viable option, which means you will need to demonstrate the business’s holistic value in relation to the division of your marital property, which is often an arduous and exacting task that can only be accomplished with a credible business valuation.
If your divorce involves a business in which only one of you works, but that still supports the entire family, it generally makes the most sense for the person running the business to continue to do so post-divorce. This usually means you will need to get creative regarding buying the other spouse out.
The court understands that businesses tend to retain far greater value when they are allowed to remain whole in the division of marital property. As such, the court is very likely to work with you regarding your intention to keep your small business intact. Toward this end, any one of the following options may come into play:
Award your spouse a certain percentage of the business assets or income.
Buy out your spouse’s percentage of the business. (The spouse who sells his or her share of the business is often left at a disadvantage and without a source of income.)
Offer a spouse your other assets in exchange for their business ownership.
Continue to jointly own and run the business.
Continue to run the business by yourself while your spouse retains a specified financial interest in the enterprise.
It is best to consult with a skilled divorce attorney to identify the most appropriate option in your particular situation.
Dividing Your Business
If possible, you should try your best to divide your business amicably. Splitting up your business amicably allows you to find creative solutions and save a lot of money on court costs and litigation.
Reaching an agreement may be difficult if you are not represented by an experienced attorney. Your attorney can help you find a mutually beneficial resolution to split your business upon a divorce. The following options are resolutions you may consider:
Divide your business into two separate organizations or entities.
Sell your business and divide the proceeds between you and your spouse.
Dissolve the business.
If you and your spouse cannot come to an agreement, your lawyer may suggest mediation.
Talk to a Waco Divorce Lawyer Today
Dividing a business in half is rarely feasible, but there is no reason to allow your business to be destroyed in the divorce process. The divorce process can quickly become heated—or worse—which can make keeping your business up and running very difficult.
If you believe your business is faltering as a result of the divorce process itself, an experienced divorce attorney will help you explore your legal options, which may include a temporary injunction that can help prevent further damage. Consult with our Waco divorce attorney at The Law Office of Brett H. Pritchard to talk about your options.
Our lawyers can help you protect your business, identify separate assets, and navigate property division laws in Texas. We strive to give our clients the best possible outcome that can help protect small businesses now and into the future. Call us at (254) 781-4222 or contact us online today to schedule your FREE consultation.