I own a business or a professional practice. What happens to it in a divorce?
In a Texas divorce, a business or professional practice is treated like other property. The first question is whether it is community property, separate property or partly both. The second is what it's worth. The third is how its value is divided, which often means one spouse keeps the business and the other receives other property or payments. The answers depend on when the business started, how it's owned and the records that back it up.
A business is often more than property
Your business may be your livelihood, your employees' livelihood and years of your work. If your spouse owns it, you may have helped build it, or you may depend on its income. Either way, a divorce raises hard questions about its future. Scott's aim is to help you through the process "so you can start your new life from the strongest position possible."
Step one: is it community or separate?
Texas presumes that property either spouse has during the marriage is community property (Tex. Fam. Code §3.003). A business started during the marriage is usually community property.
A business one spouse owned before the marriage, or received by gift or inheritance, is generally separate property (Tex. Fam. Code §3.001). That doesn't always end the question. If marital money or effort went into a separate business, the community may have a claim for reimbursement. Texas law recognizes a claim where a spouse's "time, toil, talent, or effort" enhanced the value of separate property beyond what was reasonably needed to manage and preserve it, and the community "did not receive adequate compensation" (Tex. Fam. Code §3.402).
How the business is organized also matters. A sole proprietorship, a partnership, a corporation and an LLC can be treated differently. A spouse who owns shares in a company owns an interest in it. The company itself usually owns its equipment, accounts and contracts.
Step two: what is it worth?
Most businesses aren't valued by a quick look at the bank balance. A valuation often looks at some combination of:
- Earnings. What the business reliably produces, after a fair salary for the owner.
- The market. What similar businesses have sold for.
- Assets. What it owns, less what it owes.
Small choices in a valuation can move the number a great deal, such as how the owner's pay is treated or which years are used. That is one reason each spouse may want someone qualified looking at the numbers.
Personal goodwill in a professional practice
For doctors, dentists, lawyers and other professionals, part of a practice's value may come from the professional's own skill and reputation. Texas courts generally treat goodwill that is personal to the professional differently from goodwill that belongs to the business itself. Sorting out which is which can significantly affect the value that gets divided.
Step three: how is it divided?
Courts and couples rarely split a working business down the middle. Common approaches include one spouse keeping the business while the other receives other property of similar value, a buyout paid over time, or, less often, selling the business. Partnership, operating or buy-sell agreements may limit what can happen to an ownership interest, so those documents matter early.
Keeping the business running during the case
Once a divorce is filed, some counties' standing orders apply automatically. In Denton County, for example, personal and business records must be protected, and destroying relevant electronic information is barred (Denton County standing order). In Dallas County, the standing order applies in every divorce filed there. Tarrant County has no automatic standing order, so either spouse may need to ask the court for temporary orders.
Before you change your salary, move business money, take on new debt or bring in a new partner, talk to a lawyer. Ordinary business decisions can look very different once a divorce is pending.
What to gather
- Business tax returns and financial statements for several years.
- Formation documents, operating or partnership agreements, and any buy-sell agreement.
- Records of when and how the business was started or acquired, and with whose money.
- Payroll records showing what each spouse has been paid.
- Any premarital or postmarital agreement. See prenups.
Scott studied accounting before law school, so financial statements and tax returns are familiar ground for him. His first consultation is free and confidential.
Questions people ask
I started my company before we married. Can my spouse get any of it?
A business owned before marriage is generally separate property. Your spouse may still have a reimbursement claim if community time, effort or money went into it during the marriage. It depends on your facts and your records.
Will I have to sell my business?
Usually not. More often, one spouse keeps the business and the other receives other property or payments. The right approach depends on the value, the other assets and what both of you agree to or a court orders.
My spouse owns the business. How do I know what it's really worth?
A divorce case has formal ways to get the business's financial records. In many cases, a qualified valuator reviews them. Talk to a lawyer about what's needed in yours.
Can I keep running the business normally during the divorce?
Generally, yes, but check your county's standing order and get advice before making unusual moves with money, salary or debt.
