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What Happens to Your Family Business if You Divorce?

Vector of a sad businessman and woman sitting on a very long contract document feeling desperate

Some assets in a divorce are simple, if painful, to distribute; one party gets the house, the other gets the car and a larger share of the bank account. Other assets can be exceedingly complex. What happens when you own and operate a business during your marriage? Does half of your business suddenly belong to your ex upon your divorce? Continue reading for a discussion of what happens to the family business when you divorce, and call a Houston family law attorney for help with a Harris County divorce.

The Family Business is Property Subject to Distribution

Texas is a community property state. That means that half of what you own belongs to your spouse, and vice versa. All property acquired and income earned during the marriage is considered community property, subject to equal division between the parties. Whether a particular piece of property is subject to divorce depends upon when it was acquired and other factors. Property acquired before the marriage is separate property, not subject to division.

A business is considered property, just like any other asset, albeit more complex to apportion. If the business was established during the marriage, the entirety of the business (or at least the spouses’ interests in the business) will be community property, subject to division. Even if the business was started before the marriage, the business might still be considered community property if, for example, community property funds were used to maintain and expand the business or if the non-owner spouse quit their job to contribute to the business.

It is possible that only part of the business’s entire value will be considered community property. If the business existed prior to the marriage and grew in value during the marriage thanks in part to community property funds and the efforts of the owner spouse, then the parties may establish that the increase in value of the business during the marriage is community property. Such divisions can become exceedingly complex. Whatever part of the business is treated as community property will be subject to 50/50 division.

The Business Must be Valued

In order for the business to be properly incorporated into the community property estate, the parties and the court will need to establish the value of the business. Valuation should be established by way of accountants, appraisers, and other financial experts. Many variables may come into play, including whether to value the business based on current revenue or future projections, whether to look at what price the business would fetch on the open market, or whether the success of the business is based primarily on the goodwill or skill of the owner spouse.

Options for Dividing the Business

Once the value of the business has been established and the portion of the business fairly said to be community property has been determined, then the parties must decide how to divide the business. Often, the ideal resolution is for one spouse (the owner spouse, the party more involved in running the business) to take possession of the entire business. They can buy out the other spouse’s interests in cash, or the parties can agree on an equivalent exchange of community property–one spouse gets the entire business, the other spouse gets their share of the business’s value in other community assets. Alternatively, the parties can agree to sell the business and split the proceeds based on the community estate share (e.g., if 50% of the business is community property, then 25% of the business sale proceeds go to the non-owner spouse).

In rare cases, the parties choose to continue co-owning the business after the divorce is finalized. If two parties who cannot remain married can effectively co-own a business, then this option might be on the table. If the parties disagree on the outcome, the court will need to be convinced that co-ownership is a reasonable option.

A Prenuptial Agreement Can Alter the Property Division

It’s important to note that there are ways to prevent a business from being considered community property and split up during a divorce. One way is to create a prenuptial that spells out how the business will be dealt with in case of divorce. If you want to protect a business from being shared, split or sold in a divorce, a properly drafted prenuptial agreement might be able to accomplish this feat. Wishing you’d gotten a prenup? A post-nuptial agreement can be used to change or define property rights between people who are already married. A skilled family law attorney can help you negotiate and draft a post-nuptial agreement that protects your business.

If you’re going through a divorce in Texas and want experienced, considered advice and representation in protecting your interests, securing favorable asset distribution, resolving a custody dispute, or reaching a divorce settlement, contact the Houston offices of family law attorney Maria Lowry for a consultation on your case.

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