When a couple files for divorce and own a business, it creates unique issues that must be addressed in the divorce process. This article provides an overview of some of many of those issues.
Businesses Can Be Community Property
Businesses are no different than any other asset when it comes to application of the community property rules in Texas. You can learn more about community property and the general rules for property division here.
There is a presumption that every asset a couple owns is community property and community property is subject to divorce. This means that unless you can show the business is separate property, it is an asset subject to division in the divorce.
One unique issues that arises is with regard to reimbursement claims.
If one spouse has a separate property business, then the other spouse may have a reimbursement claim for time, toil, and effort that the owner spouse put into growing the value of the business during marriage. That reimbursement claim could impact the property division even though the business itself will not be divided in the divorce.
Ways To Divide A Business In Divorce
There are several different options when it comes to dividing a business in divorce. Remember – this only applies to a community property business. Separate property is not subject to division during a divorce.
The first and usually simplest option is a buyout. This means that one spouse purchases the other spouse’s interest in the business as part of the divorce. A buyout is usually accomplished by awarding the entire business to one spouse. The other spouse then receives additional property outside of the business to offset the value of his or her interest in the business.
Alternatively, the business owning spouse may make cash payments to the other spouse to buy out his or her interest. In this scenario, it is important for the other spouse to obtain some type of security interest to protect those payments.
The second option is to sell the business. This requires more time and effort and risks destroying some value in the business if it is sold as a distressed asset. This option requires that the parties exercise caution in how they conduct the sale to avoid a loss in value.
This option also requires that the spouses come to an agreement or seek a court order on how to value the business for the sale. It may also require agreement or court order on the process for conducting the sale. If the court is involved in ordering the valuation or sale process, then it is important that the parties exercise caution. Court orders are public records that could affect the amount received in the sale if the purchaser gleans anything of value from the order.
A third option is to divide the spouses’ interests in the business but allow them to continue as co-owners of the business. This option requires that the spouses be capable and willing to continue their business relationship after the divorce.
Instead of awarding the business entirely to one spouse, we let each spouse keep their interest in the business but partition their interests into each of their own separate property post divorce. In this scenario, it is important that the spouses take steps to protect themselves by drafting buy-sell agreements or other documents to govern their relationship as co-owners moving forward.
Issues For The Non-Owner Spouse
When one spouse is the day to day owner/operator of the business, it creates unique issues for the spouse not involved in running the business.
The non-owner spouse likely has limited knowledge of the business’s operations and assets. This can create a situation where it is easy for the owner spouse to hide assets in the business.
This also creates problems with regard to valuation of the business.
Sometimes the non-owner spouse believes the business to be worth substantially more than it actually is worth. Alternatively, the owner spouse may use the other spouse’s limited knowledge to argue that the business is worth less than it actually is worth.
It is common for business owners to run personal expense through their businesses for tax reasons. This can have a significant impact on the value of the business if not properly identified and accounted for in any valuation.
Issues For Business Owner Spouses DURING Divorce
There are unique issues for spouses that arise during the divorce when both spouses are involved in running the business as well.
Ideally, the spouses can cooperate to continue running the business during the divorce. Sometimes it is difficult to separate the emotions of the divorce from the practical aspects of needing to run the business.
This can create problems with employees, day to day operations, and in extreme cases it can damage the value of the business. In these situations, it may be necessary to appoint a receiver to take over operation of the business on a day to day basis.
If the spouses cannot reach an agreement on running the business during the divorce, then they may need the court to issue temporary orders on who will run the business while the divorce is pending.
Issues For Business Owner Spouses AFTER Divorce
What if one of the spouses is leaving the business as a result of the divorce but has relied on a salary from the business? This can create a financial burden on the departing spouse that must be addressed in the divorce.
What if both spouses are key employees in operating the business but one is leaving the business as a result of the divorce? How does that impact the value of the business as a going concern? Will that departing spouse be allowed to compete with the business after divorce?
As you can see from the discussion above, divorce involving a business can quickly add another layer of complication to the divorce process.
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