Business Assets in a Divorce
A family business can often feel like a home away from home, and co-workers and employees can feel like family in their own right. However, when a marriage dissolves and the interests in a family business are divided, an owner’s interest in that business serves as more than a sentimental attachment. It serves as an asset that needs to be addressed by the trial court in the family’s divorce case.
The Texas Constitution enshrines a common system across the state to resolve property allocation after the bonds of matrimony are dissolved and empowers the state legislature to create specific rules applicable in divorce cases. Barring certain exceptions, an ownership interest in any particular type of asset—from homes to retirement accounts to ownership interest in businesses—will be distributed by the trial court in accordance with these rules. Whether a spouse will remain empowered to keep their business after a divorce is a matter for the courts to decide – if spouses cannot reach an agreement concerning this issue without judicial intervention.
Texas Business Assets in a Divorce Attorney
Dividing a business can be one of the most contentious and misunderstood parts of a divorce. If you are navigating this specific aspect of a divorce, Texas family law attorney Matthew Horak at Horak Law can help. Mr. Horak has extensive knowledge in the area of family law. He is ready to fight with you to protect your business.
Call Horak Law at (713) 225-8000 to schedule a free consultation. Horak Law has offices in The Woodlands and Houston, TX.
- The Basics of Property Allocation After Divorce
- Evaluating Ownership Interests In Businesses
- Dividing Ownership Interests
- Additional Resources
The Basics of Property Allocation After Divorce
According to the Texas Family Code, the fundamental goal of a divorce trial court is to achieve a “just and right” division of marital assets. This is an equitable, but not necessarily 50/50, standard of equality. To capture this and flesh out a common standard across Texas, fundamental legal principles have been codified by the state legislature. First, the Code requires that the trial court presume that each spouse has worked throughout the marriage to advance the interests of their combined marital unit. This is a legal concept called “community property,” and in community property states, property rights are divided based on time, title, and other factors.
In general, trial courts presume that any property acquired by either spouse during the marriage belongs to the marriage itself as a separate legal entity above and beyond each individual spouse. Separate property is 1.) property acquired before the marriage; 2.) property that was given as a gift or inheritance; 3.) most damages recovered from personal injury claims; and 4.) property acquired distinctly from one of the previous three sources.
Because of the communal property presumption, any spouse claiming that a specific asset is separate property must prove that one of these exceptions applies by clear and convincing evidence, which is a higher standard than the preponderance of the evidence standard typically applied in civil cases. For the fourth type of separate property, a process called “tracing” is required to prove that the separate property was directly exchanged for the claimed separate property.
Evaluating Ownership Interests In Businesses
Whether or not a spouse can keep a family business in the wake of a divorce depends on many factors. The basic principles above, which are generally applicable to all types of property, also apply to any type of ownership interest in a business entity. From owning shares in a private corporation to a limited partnership, a spouse’s efforts during the marriage to create, acquire, or improve a company become a part of the overall marital estate. However, a spouse will be allowed to retain separate property, even when one or both of the parties have contributed to improving the business in question. Does this sound complicated? That’s because it is. Thankfully, an attorney can explain how these broader legal concepts apply to your situation uniquely.
EXAMPLE: To illustrate these concepts, consider the following example of ownership in a multi-generational family business. Spouse A’s mother owned 100% of a bakery business prior to Spouse A and Spouse B’s marriage. Spouse B joined and purchased a 25% interest in the company. Spouse A and Spouse B, who fell in love while working at the bakery, eventually got married, and all three worked at the bakery together. Spouse A and B then together saved up doing various part-time jobs and purchased 50% more of the bakery from Spouse A’s mother, who wanted to retire from the day-to-day operations but retain some of the profits during retirement.
Spouse A’s mother then passed away, and in her Last Will and Testament, specifically bequeathed her remaining 25% ownership interest in the company to Spouse A, her child. Spouse A and Spouse B then get divorced a few years later. At the time of divorce, Spouse A had a 25% separate interest in the bakery business—the portion that was specifically devised in the Will. Spouse B has a 25% separate interest as well—the portion that was purchased prior to the marriage. Additionally, both Spouse A and Spouse B hold 50% of the business that they had purchased together as community property, which technically belongs to the marriage itself, but will likely be divided between Spouse A and Spouse B after a trial. Therefore, each spouse will leave the marriage with a 50% ownership interest in the bakery.
Dividing Ownership Interests
After determining the ownership of the various assets owned as separate and community property by the spouses, the trial court must equitably divide the remaining community property between the spouses. In doing so, the trial court has nearly-unlimited power to create a fair division of marital property.
Generally, the complexity and expense associated with assessing and dividing an ownership interest will mean that one party or another will exchange other marital property for complete ownership of a single business in order to avoid dividing, creating, or destroying ownership interests. However, the trial court may instead choose to force a sale. This can be a private sale to the other spouse, a third party, or even a public auction. Or, in some exceptional cases, the trial court may even order the parties to work together as partners in a continuing business operation. Because of the complexity involved in how individuals structure businesses, the trial court has a great deal of discretion to implement creative solutions.
Texas Secretary of State – This Texas Secretary of State resource explains aspects of various types of business structures. Depending on the type of business structure and the particular ownership interests involved, a trial court may be more or less able to be creative with allocating company interests equitably.
Start a Texas Business – This step-by-step guide to starting a business in Texas is made available by the Office of the Governor, Texas Economic Development.
Houston Business Assets in a Divorce Lawyer | Harris County, TX
If you are facing a contentious divorce and you feel like your business is in danger, you do not have to fight alone. Matthew Horak at Horak Law is an experienced divorce lawyer and he ready to fight with you to protect your interests. He can provide legal advice and planning that will protect your business interests, and work toward making sure that the division of assets in your divorce case is fair.
Horak Law has two locations in Houston and The Woodlands, but we also accept clients in Harris County, Montgomery County, Brazoria County, Galveston County, Waller County, Fort Bend County, and Liberty County, Texas. Call Horak Law today at (713) 225-8000 or submit an online contact form to schedule your first consultation.