In Texas, a closely held business may be divided during a divorce even if you as the business owner have been the only one involved in operating the business. You cannot protect the business from getting divided if it is a community-owned business--however, you can make sure the business is protected as much as possible under the law. Below are some issues and tips you should take into consideration if you are worried about your closely held business during your Texas divorce. First, we’ll go over two steps you’ll need to take:
Determine What Interest Your Spouse Has in the Business
Texas is a community property state, meaning assets acquired during the marriage are typically considered jointly owned. Whether your business is subject to division depends on when the business was started. The good news is, if started before the marriage, it will most likely be considered separate property and your spouse won’t have to be “bought out” of their interest in the divorce. However, any income/assets from this separate property business can still be considered community. For example, if you started a business a few years before getting married but during the marriage, it brought in income which is still sitting in a account in a financial institution, be aware that this is a dividable asset in your divorce.
Further, be aware that any community assets that were contributed to the separate property business might need to be reimbursed to the community. For example, if you used income during the marriage to put a down payment on a new building for your separate property business, the amount of that down payment may need to be put back into the community assets for the purpose of dividing the assets.
Determine The Value of Your Business
The value of a community-owned closely held business, however small, will be very important when it comes to the final asset division in a divorce in Texas. If your spouse and you cannot agree to the value of the business, you should immediately hire a business valuation expert. As these business valuations can take several weeks to months, doing this early in the divorce process is smart.
The business valuation expert will need as many documents as possible to determine what amount the business should be valued at. It is best to get them all that they are asking for as soon as possible to streamline this process.
Be aware that if your spouse does not agree to helping pay for the business valuation expert, you may need a court order or ask for reimbursement for this expense in the final division.
Further, if your spouse does not agree with the valuation amount, they may get their own competing expert business valuator to make their own determination of the value of the business.
Tips to Protect Your Rights to a Closely Held Business
Before filing for divorce, the below tips are helpful if you ever find yourself in the divorce process and want to make sure your business is protected:
- Consider a post-nuptial agreement with your spouse
Much like a pre-nuptial agreement, a post-nuptial agreement can help you and your spouse come to an understanding about how certain assets will be divided in a divorce. If you believe your spouse and you are on the same page when it comes to the business and its assets, doing a post-nuptial agreement is a great way to make sure what each of you want protected in the divorce is protected.
- Do not commingle your personal and business assets
This tip is especially important if you have a separate property business. Commingling your business’s financial assets with your personal assets may allow your spouse to reach business assets they normally would not have had access to. Keep separate accounts and trace all business expenses as diligently as possible.
- Make sure all your business records are kept accessible
If you are in a contested divorce in Texas, your business records are considered discoverable by the other side. This means your spouse and their attorney may ask for all the records. If you cannot produce standard business records, it may make the process more difficult and expensive. If left up to a court, a judge may even give your spouse more than what you believe the business may be worth because there are no records proving otherwise.
- Consider mediation during the divorce
Many Texas courts require mediation before trial as it is the best way for parties to resolve their issues creatively and without court intervention. If you are forced to go to trial, sometimes the financial cost and the risks you will not receive what you believe you should in the divorce are much higher. In mediation, you can use a neutral mediator to negotiate an agreement that benefits you both in some way without the need for the court to make any determinations about your business that you may not agree with.
- Consider a buy-sell agreement
If you and your spouse are both co-owners of a closely held business, you may want to speak to a business attorney to draft an agreement on how the business will be divided, how it will be valued, and other considerations in case of a divorce. This agreement can help you if you’d like to be the one to continue to run the business post-divorce, want to use community assets to further grow the business, and simplify the valuation of the business process.
If you are considering a divorce in Texas, you should speak to a divorce attorney who is familiar with Texas laws and courts such as Hunt Law Firm, PLLC. An attorney can advise you more specifically based on your unique situation and facts.