What Happens to a Business in a Divorce?
When divorce is on the horizon, one of the biggest concerns for business owners is how to protect their company. In Texas, community property laws mean that any business started during the marriage is considered shared property. This can lead to disputes over how the business should be valued and divided.
To ensure a fair resolution, it’s essential to understand what options are available for protecting your business during a divorce.
The Role of Business Valuation
The first step in dividing a business is determining its value. Business valuation involves assessing assets, liabilities, revenues, and profits. However, this process can be contentious.
Each spouse may hire their own valuation expert, leading to different assessments of the business’s worth. For example, the spouse running the business may want a lower valuation, while the other spouse may seek a higher one. Attorneys must skillfully question these experts to ensure the valuation is fair and accurate.
How Community Property Affects Business Ownership
In Texas, if a business is started during the marriage, both spouses have a community property interest in it. Even if one spouse never worked in the business, answered calls, or managed finances, they still have an equity stake.
The court’s goal is to divide community property in a manner that is “just and right.” Often, this means awarding the business to the spouse who actively runs it while compensating the other spouse with other assets.
What If There Aren’t Enough Assets to Offset the Business?
Sometimes, the business’s value exceeds the available assets to divide equally. In these cases, the spouse retaining the business may buy out the other spouse’s share over time. This buyout can be structured as a series of payments, such as monthly installments or annual lump sums.
For example, if the non-owning spouse’s equity is valued at $200,000, the owning spouse may agree to pay $2,000 per month until the balance is paid off. This ensures that both parties receive fair compensation without jeopardizing the business’s operations.
Can You Protect Your Business Before a Divorce?
One of the best ways to safeguard your business is through proactive planning. If you’re considering divorce, tools like operating agreements and postnuptial agreements can be invaluable.
An operating agreement for an LLC can include provisions for how the business will be divided in the event of a divorce. For those without an operating agreement, a postnuptial agreement can outline terms for business division before disputes arise.
Creating these agreements when the relationship is amicable can prevent conflict and save time during divorce proceedings.
Avoiding Breach of Fiduciary Duty
During a marriage, both spouses owe each other a fiduciary duty. This means that actions taken to intentionally harm the other spouse’s financial interests can lead to legal consequences. If you’re concerned about protecting your business, consult with an attorney to ensure you don’t unintentionally open yourself up to liability.
Work With Attorneys Who Understand Business and Family Law
Dividing or protecting a business in a divorce requires both legal and financial knowledge. At Youngblood Law PLLC, we understand the unique challenges business owners face during divorce proceedings. Let us help you navigate this process and protect what matters most.