When Your Divorce Involves a Business

Wedding rings on top of a document explaining property division in Texas

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One of the most complicated aspects of divorce tends to be the division of marital property, and if there is a business involved, it makes the issue that much more challenging. If you are considering a divorce or are facing a divorce that involves a business, you shouldn’t wait to seek the professional legal guidance of an experienced Round Rock business divorce lawyer.

The Division of Marital Property

The division of your marital property is a primary divorce term. Marital property refers to any assets that you, your spouse, or both of you together came to own over the course of your marriage.

The name attached to the property generally has no bearing on the classification of the property. If you came to own it while you were married, it is marital property. The only exceptions include the following kinds of property:

  • Inheritances in one spouse’s name alone

  • Gifts in one spouse’s name alone

Upon divorce, marital property must be divided fairly between both spouses. This fair division can mean an equal division, but this isn't always the case.

Separate Assets

If you or your spouse owned something prior to marriage that was kept separate throughout your marriage, it remains the separate property of the original owner.

When a separate asset becomes entangled with marital assets, the dividing line between the two can be obscured, meaning that some separate property may be at risk of division. Additionally, any increase in a separate asset’s value is likely marital.

The spouse who considers an asset separate has the burden of proving its separate nature. All told, the matter of identifying assets as separate can become very complicated very quickly.

Factors Considered

Texas courts consider the following factors when dividing marital assets:

  • Each spouse’s separate estate and the size of the marital estate

  • The contributions each spouse made to the marriage – including financial contributions, housekeeping, and childcare

  • The degree to which either spouse contributed to the other’s career

  • Each spouse’s level of education and earning power

  • Each spouse’s age and overall physical and mental health

  • The tax implications of a proposed property division

  • Whether fault played a role in the dissolution of the marriage

  • Any inheritances anticipated in the future

  • Any wasting of marital assets

  • The cost of divorce litigation

When One Spouse Owns the Business

Business ownership can complicate the division of marital property. Even if one spouse owned the business in question prior to marriage, it doesn’t necessarily mean that it is their separate property – or that it is entirely their separate property. For example, all the following factors can affect the separate nature of a business:

  • A spouse who runs a business without compensating himself or herself fairly fails to benefit the marriage, thus eroding the separate nature of the business.

  • Using marital assets to grow the business can also blur the line between separate and marital property.

  • Failing to keep marital and business financials distinct from one another can make it very difficult to claim a business as separate.

  • Any increase in a business’s value over the course of a marriage is likely to be considered marital property.

  • If both spouses are employed by the business, it can complicate the matter further.

Establishing the separate nature of a business can be challenging in and of itself. If you have concerns about proving that your divorce is separate property, work closely with a Round Rock divorce lawyer to protect your financial rights.

Valuing the Business

Ultimately, whether the business in question is deemed separate or marital, you’ll need to have it valued to ensure that the division of your marital property is fair. While the surest means of determining a business enterprise’s value is selling it, selling a business for the sole purpose of divorce is unlikely to make financial sense. While some divorced couples continue to own and run their businesses together, this can be incredibly difficult.

Emotional Connection

If one of you considers the business your separate property or was far more invested in the enterprise than the other, it can lead to an emotional attachment that makes negotiating a fair settlement that much more challenging.

While running a business is often a labor of love, this does not alter the fact that the asset is marital property – or will likely play a significant role in the division of marital property. Separating emotions from the cold, hard facts of divorce is a complicating factor.

A Mutually Acceptable Value

It’s very likely that one of you will need to walk away from the business while the other will need to buy out that spouse’s percentage of ownership. In order to do this, you’ll have to establish a value that you can both live with.

There are many ways of valuing a business, and while each method should theoretically produce a similar result, you and your spouse could be left with two very different conclusions.

One means of circumventing this problem is choosing a valuator together and agreeing ahead of time to accept the forthcoming valuation amount. This agreement will provide you with a value that will help guide the way toward a fair settlement.

Goodwill

In addition to the value of the physical assets that make up your business, such as the building and machinery, there are intangible assets, like goodwill, to consider. Because goodwill directly affects the value of the business, it has to be taken into careful consideration in the valuation process.

Texas addresses both enterprise and personal goodwill. Enterprise goodwill refers to the business’s ability to attract and retain customers based on several factors:

  • Location

  • Reputation

  • Skill and ability

Enterprise goodwill reflects the business’s essence or brand and is an important component of its value that must be addressed in the event of divorce.

Personal goodwill refers to each spouse’s personal reputation and skill that allows him or her to attract and keep customers. Personal goodwill is assigned solely to the individual spouse and isn’t included in the division of marital property.

Fair Dealings

One of the most important considerations when it comes to business ownership and divorce is the fact that a business offers many avenues for obscuring income and overall value. This concern increases when one spouse is far more involved in the business than the other.

Often, forensic accounting is required to help ensure that the spouse running the business doesn’t engage in unfair or sneaky practices that deprive the other of marital assets to which they’re entitled. A knowledgeable Round Rock divorce attorney can help you find a forensic accountant to keep your divorce financials straight.

Prenuptial Agreements

Prenuptial agreements are legal contracts that go into effect upon marriage. Postnuptial agreements serve the same purpose but go into effect during the marriage. If you and your divorcing spouse have a valid prenuptial or postnuptial agreement that addresses the business in question, the terms laid out in this legal document will prevail.

Addressing the Business

If you are facing a divorce and there is a business involved, it’s likely to be the most valuable marital asset, which makes it more challenging to address fairly. There are several methods that commonly apply when attempting to divide a business fairly between two divorcing spouses.

Buying the Other Spouse Out

The spouse who is interested in keeping the business – or who owns a more considerable portion of it – can buy out the other spouse’s share. Options for buying out a spouse can include making up the difference with additional assets if the marital estate is large enough, obtaining a loan to buy the other ex out directly, and buying the other spouse’s ownership out over time.

Selling the Business

In some instances, selling the business is a viable option, but selling a business in direct response to a divorce doesn’t always make financial sense.

In the end, you and your spouse will need to share the proceeds, and if the market doesn’t support a solid sale price, you’ll both lose out. If both of your incomes flow from your business, selling it likely means you’ll both need to start over.

You may also need to consider these additional challenges that arise from selling a business:

  • Selling a business can take a significant amount of time, which can slow down your divorce or keep your finances tethered to your ex’s for longer than you’d like.

  • Finding the right buyer can be difficult, and you may have to accept less than the business is worth.

An important part of every business’ value is tied up with running it, and selling your business in response to divorce can mean losing value.

Co-Ownership

Couples who are ready to call their marriage quits often prefer to separate their lives as completely as possible, which includes dissolving business connections. However, this isn’t always the case. Some divorced couples find that they are excellent business partners and that they both stand to gain by continuing to run their business together.

This situation is rare, but it does happen and may be a possibility for you and your ex to explore.

FAQ

How Do I Know If My Business Is Separate or Marital Property?

If you started the business while you were married, it’s almost certainly a marital asset. If you owned your business prior to marriage and kept it separate throughout, it is likely separate property. However, your divorcing spouse may be entitled to a portion of your business.

For instance, if the business increased in value during the years of your marriage, this increase will likely be classified as marital.

What If I Worked in My Spouse's Business?

Even if your spouse owned his or her business separately prior to marriage, if you were involved in the business throughout your marriage, the asset will likely be classified as marital. The intersection of business ownership and divorce is especially complicated, and working with a trusted Round Rock business divorce lawyer is always well advised.

What Should I Do If I Think My Spouse Is Hiding Assets?

Owning a business is a complex financial matter, and it provides many opportunities for hiding assets, spending down marital property, and otherwise engaging in less-than-fair financial practices.

If your spouse runs the business in question – or is more involved in its finances – it can leave you far more vulnerable to dirty dealings. Further, if your spouse thinks of the business as their own – even if the court doesn’t see it that way – they may be more inclined to actively hide assets or engage in another form of financial fraud.

If you are concerned that your divorcing spouse may be hiding assets, you shouldn’t wait to share this information with your skilled business divorce lawyer. The best path forward is with careful forensic accounting, and your attorney has the skill, experience, and legal insight to help ensure that your financial rights remain well protected.

Can a Prenuptial Agreement Protect My Business Rights?

If you have a valid prenuptial agreement in place that addresses ownership of the business in question, the court will uphold the terms included. Only factors like the following can void a prenuptial agreement in the State of Texas:

  • The prenuptial agreement wasn’t in writing or wasn’t signed by both parties.

  • Either spouse was coerced into signing the agreement or did so under duress.

  • The agreement itself is lopsided to the degree of being unconscionable.

A prenuptial agreement can also be nullified if either spouse failed to provide the other with a complete financial disclosure – and if the spouse on the receiving end didn’t waive this right.

Reach Out to an Experienced Round Rock Business Divorce Attorney Today

If you are facing a divorce and there is a business involved, you need skilled legal representation. Brett Pritchard at The Law Office of Brett H. Pritchard – proudly serving Round Rock, Texas – is a formidable business divorce attorney with imposing experience successfully protecting his clients’ business ownership rights.

Your financial rights are important, so please don’t put off reaching out and contacting us online or calling us at (254) 781-4222 to schedule your FREE consultation and learn more about what we can do to help you today.

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