How a business is affected by a divorce depends heavily on the type of business. In most cases, the ownership interest of the business will not change; however, the value of the business or a spouse’s interest in the business will affect the overall division of the community estate.
Character of the Business
How will a business be divided in a divorce? Texas is a community property jurisdiction. This means that any property acquired during the marriage is part of the community estate. Any property owned or acquired prior to the marriage, was gifted, or inherited is that spouse’s separate property. A Texas Judge cannot divide separate property, they can only confirm is as that spouse’s separate property; however, income received by a spouse from separate property is community property. Additionally, any business interest that is community property is subject to the fair and equitable division of the community estate. In practical sense, the ownership interest will most likely be retained by the spouse with the said interest. However, the value of that interest must be quantified.
Business Valuation
The value of your business depends on many factors. It is important to hire an expert who will conduct a business valuation or appraisal to determine the fair market value of the business. Depending on the type of business, the expert may use a few different approaches in determining the value of the business—the market approach (comparing your business to recently sold businesses that are similar in nature), income approach (estimated future cash flow), or asset approach (value of assets owned by the company subtracting any liabilities owed). Additionally, the expert will consider any intangible assets of the business such as intellectual property or goodwill.
Goodwill is an intangible asset that its value is based, among other things, on a business’ reputation, brand recognition, customer loyalty, and location. Goodwill is speculative in nature which is why it is important to have an expert that fully understands how to quantify it.
LLC’s and Partnerships
For LLC’s and Partnerships, it is extremely important to look at the structure of the business—this will control the member or ownership interest. The formation documents should have clauses which dictate how the spouse’s interest is handled in the event of a divorce. However, if the spouse is the only member of the LLC then the business should be appraised and the community interest be accounted for the in the division of the community estate.
Joint Ownership Between the Spouses
If there is joint ownership between the spouses, the main concern is whether the divorcing spouses can maintain a cordial or professional business relationship. It is best practice to have a clean separation financially between the spouses once the divorce is finalized. If one spouse has majority control of a co-owned business, then they may be tempted exploit that power to the own benefit and to the detriment of the other now ex-spouse. This can put the now ex-spouses in future litigation. However, if both spouses maintain equal control, then the possibility of disagreement resulting in a stand-still may occur—again, triggering more litigation.
It is important to have an attorney that understands the intricacies of business ownership, valuation, and division in the divorce process. The attorneys at Hunt Law Firm, PLLC are here to help. If you would like more information or to speak with an attorney, feel free to give us a call at 832-781-0320.