Dividing a Business during Divorce

When a couple begins the divorce process, their assets and liabilities may be divided through a settlement agreement. When one or both spouses have ownership of a business, the valuation of the business is included in the assets and liabilities that are divided. In this case, the process of valuing and dividing a business property takes special legal expertise.

The division of assets in general is more complex for high-net-worth couples with extensive assets. Businesses are one of the more intricate examples.

If you are facing an imminent divorce, and aren’t sure how your most important assets will be divvied up, your best option is to consult with an experienced lawyer and quickly educate yourself with the basics. Here are the most crucial things to know about dividing a business during a divorce.

What Defines a Business? 

A business has so many components that it can be difficult to ascertain how it could be divided. There are both multiple types of business ownership, and multiple ways to divide them.

The types of Business Property that can be divided in a divorce case break into 3 main categories:

  1. Closely Held Business

  2. Business Interest

  3. Business Assets

Closely Held Business entities can be in the form of:

  • ‘C’ corporation

  • ‘S’ corporation

  • limited partnership, sole proprietorship

  • limited liability company (LLC) or

  • any other recognized business entity.

Business Interest refers to ownership, partial ownership, shares, or any other financial attachment or stake in a company. If the business interest is considered community property, it is recommended that an expert in the field be consulted to determine the value. After business valuation is agreed upon by both spouses, a family law attorney will work with you to develop a strategy to attain an equitable division of the asset.

A Business Asset is an item of value owned by a company. Business assets can include anything from tangible items, such as vehicles and office equipment, to intangible items, such as intellectual property. Proper documentation of the division of the business assets, ownership rights, and ownership duties when going through the divorce process is highly critical.

Dividing a Business 

While every business and divorce are unique, there are three common ways of dividing a business during divorce:

  • Co-ownership

  • Sell the business and divide the profits

  • Buy out the other spouse’s interest

Co-ownership is generally recommended only for divorces that end amicably. If there was already serious conflict at the center of your marriage, co-ownership can be a miserable experience. If, however, you find that co-ownership is possible for you as a separated couple, it can be the simplest route.

The alternatives of selling and dividing the profits, or buying out the other spouse’s interest, will depend on your circumstances. With the guidance of a lawyer you can, in some scenarios, even use other assets to offset the difference of a business purchase. For example, you may be able to give up a portion of equity on a house, or the proceeds from a real estate sale, in exchange for a larger share of the business.

It is important to consult your lawyer throughout the process to prevent legal missteps, and to establish clear, legal agreements.

Business Valuation for Divorce 

If you decide you can’t co-own the business with your ex, you need to either sell to a third party or complete a buyout.  For either of these, you’ll need to determine the value of the business and how much each spouse owns.

A business valuation will consist of a full assessment of the combined revenue, assets, and other factors of value.

Community Property versus Separate Property 

In Texas, a business that started during the marriage is “community property”. For a business created before marriage, or started with funds earned before the marriage or by gift or inheritance, a portion can potentially be treated as a separate property (owned by one spouse).

When determining whether a business is community property or separate property, your family law attorney will need to know:

  • When the business was started

  • The source of funds used to start the business

  • The financial and labor-related contributions of each spouse to the business during the marriage

Defining whether a business is community property or separate property can be very complex, but will heavily determine the outcome of your property division.

Get the Help Necessary to Succeed 

If you are determined to get your fair share of the property being divided in your divorce, don’t try to handle matters alone. The team at Capps Law Firm, PLLC, is driven to serve our clients’ goals, and we have a proven track record of reaching those goals in close partnership with our clients. Kelly J. Capps is a board-certified family law attorney with experience in business law and business litigation (which is needed to assess whether all or part of the business is community property). Our expertise makes us a perfect match for dividing a business during a divorce.

If you would like to discuss your family law matter and the implications it has on your business, contact our office at (512) 338-9800.