According to the Census Bureau, there are some 30.7 million small business owners in this country.
Owning a small business can be rewarding, but it can also put an enormous amount of strain on a relationship.
And, when you factor in that nearly half of all marriages end in divorce, the stats don’t look so good.
So when the love is gone, what happens to your small business?
If you’re considering divorce or even mentioned it during a fight, now’s the time to take precautions to protect your business. Depending on your circumstances, your ex-spouse may be rewarded up to 50 percent of your business in a divorce.
As Burleson Divorce lawyers, we frequently help married business owners navigate the complexities of the legal realm. If you’re getting ready to untie the knot, follow these strategies to keep your business out of harm’s way.
Let’s Quickly Go Over the Basics: Separate Vs. Marital Property
It’s critical to understand the difference between separate property and marital property to prevent inadvertently doing anything that might cause a judge to rule your business as marital property.
Marital Property
Marital property consists of all income and assets acquired by either spouse during the marriage. This can include things like retirement plans, stocks, commissions, bank accounts, real estate, vehicles, art, and businesses.
Texas is a “Community Property” state. This law means both spouses are equal owners of all marital property (a 50-50 split is the general rule).
If you started your business during the marriage or the company benefitted the marriage in some capacity, it will be considered a marital asset and thus be subject to division. This is true regardless of who owns the property or how it’s titled.
Separate Property
Separate property is anything one spouse owned before the marriage.
This generally includes:
- Property that was owned prior to the marriage
- An inheritance received by one spouse solely
- A gift received by one spouse solely from a third party (not from the other spouse)
- The pain and suffering portion of a personal injury settlement they received prior to the marriage
In Texas, each spouse gets to keep their separate property when the marriage ends. This might include your small business if you owned it prior to the wedding.
Warning: The burden of proof is on you. Even if you owned the business beforehand, Texas law presumes all property to be community property unless you can provide clear and convincing evidence that you owned it and that no community funds have gone into it.
Unless you’ve been extremely careful to keep it a separate asset and have extensive documentation to prove it, chances are your spouse likely has an ownership stake in the business and would be entitled to their fair share of it in the divorce.
Possible Scenarios That Could Play Out During a Divorce Proceeding
Courts use broad discretion when determining how to divide your assets. If possible, try to negotiate a private settlement with your ex. This will help you avoid going to trial and give you control over your losses.
If you’re both unable to reach a settlement agreement, then the court will divide the property by:
- Ordering the business be sold and the proceeds split
- Awarding each party a portion of the business
- Or awarding the business to one party while the other gets ownership interest based on the valuation of the business
Assuming you don’t want to sell your business or be business partners with your ex, the third option is the best. Luckily, this is the most common outcome when one spouse has more significant involvement in the business.
What You Can Do to Protect Your Business
If you went into your marriage without any protections set in place, like a prenup or a trust, you still have choices in the divorce process to mitigate your losses and secure ownership of your business.
Step 1: Get A Business Valuation, Then Challenge It
Typically, the court will assign their own valuation professional to your case to assess the value of your business. Their appraisal is generally based on a 10-year projection of future or revenue. Sometimes these court-appointed valuation professionals don’t consider everything that factors into your business’s worth, like current revenue.
Use their appraisal, then hire another outside party to review the figures before you agree to it.
This valuation will determine how much you will have to pay your ex to pay off their ownership interest, which is why it’s critical to have their valuation double-checked by a neutral third-party organization.
Armed with the evidence from a third-party appraiser, you can challenge the court’s valuation if you find something is inaccurate or unfair or attack the value submitted by your spouse’s expert.
Step 2: Keep Good Records
A divorce case, like any other case, is a lawsuit. Whether it’s at a trial or a hearing, you’re going to have to present your case, especially when the question of shared business assets is concerned. The best way to do this is to keep good business records.
Gather any paperwork that’s relevant to your company, like the business license, previous tax documents, business transactions, and anything else that will prove your ownership and financial history with the company.
If you don’t have certain things on hand, you can contact banks, lenders, and government offices for official copies of important documents.
Most importantly, gather records of the sources of capital for the business. For example, did you use premarital or marital funds for business expenses, like rent, office space, equipment, or furniture?
Also, if there is a cash component to your company, make sure all cash transactions are well-documented. You need to be able to justify your cash reserves; otherwise, the judge may designate this as income available for child support or alimony payments.
Keeping good records is the best way to prevent your ex from receiving more entitlement to the business.
Step 3: Remove Your Spouse From the Business
If your spouse plays a role in your business, then you’ll want to remove them as soon as possible.
This isn’t limited to a full-time job position. If your spouse helped run the company in any way, assisted here and there, or even contributed business ideas, then they may be entitled to a hefty percentage of your business.
The more involved in your business your ex was, the stronger the case a lawyer could make that they’re entitled to a large portion of your enterprise.
You can’t just fire them on the spot. Ensure you’re following your company’s standard process of termination that any one of your employees would go through.
Work with your HR manager to evaluate the same considerations for anybody else in that position, like determining severance payouts for how long it might take to find a new job. Before you officially let them go, consult with your attorney on how this termination might affect your spousal payments going forward.
Surround Yourself With a Strong Team of Burleson Divorce Lawyers
Make sure you have an experienced team of legal professionals in your corner to guide you through the sometimes rocky path of divorce.
Don’t just focus on getting any divorce lawyer. Instead, look for one a lawyer who is well-versed in both business and divorce laws.
The team at Lovelace has ample experience and knowledge in analyzing business assets in the context of a divorce and can protect your business every step of the way.
If you’re heading for a divorce and want to safeguard your business, schedule a consultation with us today.
