What Happens to a Business in a Texas Divorce?
When couples divorce in Texas, spouses must divide their marital assets under Texas divorce law. However, spouses’ marital assets can include business ownership interests, including interests in partnerships or sole proprietorships that spouses may own and manage. Dividing business interests in a divorce may lead to significant conflict and extensive litigation between spouses, especially when spouses must divide a business they’ve jointly owned and operated during their marriage. Hiring experienced legal counsel can help make the asset division process smoother in a high-asset divorce and protect spouses’ financial interests and the future of their business.
Texas Marital Property Distribution Laws
Texas uses the community property system for dividing the marital estate in a divorce. Under the community property system, the law considers all marital property jointly and equally owned by spouses. As a result, courts will divide the marital estate equally in a divorce proceeding. In contrast, most states use the equitable distribution system, in which courts divide marital property fairly, though not necessarily equally.
Texas community property law recognizes that spouses have marital property and separate property. Marital property typically includes all assets acquired by a couple during their marriage. Conversely, separate property includes all property owned by a spouse before the marriage, inheritances, or property gifted separately to a spouse rather than jointly to a couple. While the community property system divides marital property, spouses can keep any separate property for themselves. However, a spouse may convert their separate property into marital property, usually by commingling separate assets with marital property.
Spouses can step outside the community property system by negotiating a pre- or post-nuptial agreement that divides marital property differently than under the community property law. A pre/post-nuptial agreement can state that a spouse’s business interests and income remain separate property during the marriage.
How Is a Company Split in a Divorce?
In a divorce, courts must first determine whether a spouse’s business interests constitute separate or marital property. Any part of a spouse’s business interest that qualifies as marital property may get divided under the community property system. When the court finds that a spouse’s business interest qualifies as marital property, the court must then place a value on the business as a whole and the spouse’s ownership interest. In most cases, courts rely on appraisal and valuation experts who can provide reports and testimony regarding the business’s value.
Courts have several options for splitting the value of a business interest in divorce. First, a court may allow the owner spouse to retain their ownership interest and compensate the other spouse for the value of that interest from other marital assets. Courts may prefer this option when dividing the ownership interest may harm the business, especially if the business has other owners/partners or the business’s governing documents prohibit splitting or transferring interests without partner approval.
As a more drastic option, courts may order the sale of the business and divide the sale proceeds between the spouses. However, courts rarely issue such orders, usually in cases where the owner spouse owns 100 percent of the business and cannot feasibly divide their ownership interest or compensate their spouse for the value of their interest from other assets.
Finally, a court may order spouses who both hold ownership interests in a business to continue joint ownership. However, courts usually pursue this option if spouses can work together amicably and indicate they wish to continue operating the business together.
How Is an LLC Treated in a Divorce in Texas?
Although most legal professionals consider an LLC a combination of the best features of corporations and partnerships, the law treats LLCs as legal entities separate and distinct from their owners. As a result, any property owned by an LLC does not become community property of the married members of the LLC. However, the law may treat a married member’s ownership interest as a marital asset subject to community property division.
When an LLC member’s interest gets divided in divorce, Texas law states that the member’s ex-spouse becomes an “assignee” of the member’s interest. An assignee of an LLC membership interest does not have the right to participate in the management of the LLC, to become a full member of the LLC, or to exercise any other rights of a member except for the right to receive income, gains, losses, deductions, or credits distributed to the LLC’s members. However, in furtherance of this right to distributions, an assignee also has the right to undertake reasonable inspection of an LLC’s books and financial records.
The Process of Dividing a Business in a Divorce
Splitting a business between a couple in divorce or dividing a spouse’s business interests may occur through one of several different processes. First, a couple may have a pre- or post-nuptial agreement that describes how any business interests get divided in divorce. In a divorce proceeding, the court will review the couple’s agreement to ensure its validity and enforceability before enforcing it and dividing business interests according to the agreement terms. Alternatively, a divorcing couple may negotiate a property or divorce settlement agreement that splits business interests.
However, when a couple leaves dividing business interests to the court, the court must first determine whether a spouse’s business interest qualifies as marital property or what portion of the value of the interest qualifies. Spouses and the court will rely on financial experts to help calculate the value of an ownership interest and determine what portion of a spouse’s ownership interest qualifies as marital property. The court will then review other circumstances, such as the total value of the community property estate and the business’s operating/shareholder agreements or bylaws, to determine the best method for dividing the business interest under community property law.
Contact Balekian Hayes, PLLC, for Experienced Legal Guidance
When you and your spouse own a business, you need seasoned advice and advocacy to help you divide your business interests in divorce. Contact Balekian Hayes, PLLC today for an initial consultation to discuss your legal options with a knowledgeable high-net-worth divorce attorney in Dallas.
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