Divorces are notoriously emotional, and, in some cases, extremely complex. The complexities increase exponentially for spouses that are also business owners. There can be an increasing number of legal issues to consider when divorce is at hand. Fortunately, there are strategies business owners can implement ahead of time to protect their business in the event of a divorce. If those measures were not taken, do not worry. There are also strategies to help protect your business during the divorce.
Advance Planning for Business Owners
If you are already in the midst of a divorce, advance planning will be of little use to you. However, taking proactive measures prior to getting married can really help protect your business.
As you build your business, do it strategically with provisions such as an LLC or C-corporations that allow you to title property and real estate to the business. Although your interest in the business may remain marital property, having a formal structure in place can help business assets from being divided up during a divorce.
Perhaps the best way to protect your business is via a premarital agreement. Yes, it can seem rather cold and calculating to insist on a prenup when you are in the throes of romantic love. That being said, divorce is relatively common, and you should enter into marriage with certain protections in place—just as you do when you sign any business agreement.
If your divorce is already in the works and you have no prenup in place, you must understand which business property is considered separate and which is considered marital property. If the business was acquired during the marriage, and there was no postmarital agreement to address the business, then you are likely subject to having the business divided during the divorce.
Make sure you have a solid valuation for the business that takes into account inventory, equipment, loans, payroll, and intangible assets like client relationships.
Houston, Texas Division of Business Assets
Individual states operate either under community property laws or equitable distribution law. In states with community property laws all marital assets are divided equally, 50-50, largely regardless of which partner made the majority of the money. In equitable distribution states, the marital assets are divided fairly, but not necessarily equally, meaning extenuating factors will be taken into consideration when dividing the marital assets.
The state of Texas is a community property state, meaning any property acquired during the marriage that is not excluded under separate property laws is subject to equal division. However, it is important to know that the state typically follows equitable distribution when dividing assets. This means the judge is likely to consider several factors when dividing assets, including:
- Amount of separate property owned by each spouse
- Tax burdens each spouse will face
- Number of children involved
- Needs of those children
- Ability of each spouse to earn a living
- Effect the divorce will have on the financial standing of each spouse
Separate property usually includes anything owned by either spouse prior to the marriage (unless money was commingled, or property increased in value during the marriage). Gifts or inheritances given specifically to one spouse are also considered separate property. As far as personal injury awards, the portion that compensates the victim for lost earnings during the marriage is subject to marital asset division.
Each asset, including businesses and professional practices, must be carefully and accurately evaluated during the divorce process. One of the most difficult aspects of a business to place a value on is what is known as “goodwill.” Goodwill is an intangible value that almost every business has. Goodwill is determined by a company’s reputation and/or its brand.
Other Factors That Determine Which Parts of a Business are Marital or Separate Property
As couples struggle with determining which parts of a business are marital and which are separate, the following factors will come into play:
- When was the business founded? Was it founded prior to the date of the marriage? After the marriage? By both spouses, or only one?
- What funds were used to start the business? Were only separate funds used to start the business, or were marital funds used?
- What were the contributions from each spouse to the business? Was the business founded and run only by one spouse? Was the business dependent wholly on one spouse’s knowledge, skills, or education? Both financial contributions as well as “sweat equity” will be considered.
Options for Handling a Business During a Divorce
To prevent the division of your business from becoming a total mess during your divorce, it is important to discuss the situation with a knowledgeable attorney who is familiar with both family law and business law, and can help advise on your rights and responsibilities.
Your particular situation will determine how a business is handled during your divorce. The business could be sold to a third party and the proceeds split, one spouse can buy out the other’s interest in the company, or the two parties can continue to run the business together, despite the divorce. The third option is rarely valid, since many couples that divorce harbor bitter feelings toward one another, but in certain cases, it could work.