A business that has been started with joint funds during the marriage is known as “community property” in Texas, so it can be eligible for division between both spouses. This is different from a business that was created during the marriage that is owned by one spouse, a business started with separate property funds like an inheritance or money earned prior to the marriage, or a business created before the marriage.
Even a separate property business is likely to have some community elements that must be considered in the division of property. Common examples of this include:
- Appreciations in business value related to joint financial contributions within the marriage
- Joint funds that were used to invest in or expand the business
- Each spouse’s contributions towards the business, if those contributions were important for the growth or operation of the company
Just like other closely held assets, professional practices and businesses in Texas have to be factored in to the overall process of property division. In order to divide the business, a business value must be calculated. This can be done using the market approach, the asset approach, or the income approach. The most complicated aspect of determining this has to do with the concept of “goodwill”.
Goodwill refers to the complete value of the business outside of the company’s tangible assets. During a divorce, Texas courts usually divide this into “professional goodwill” and “enterprise goodwill”. Professional goodwill refers to the person running the business whereas enterprise goodwill is the positive reputation attached to the actual business. Usually, enterprise goodwill is seen as community and marital property in Texas, but personal goodwill attached to one spouse cannot be divided.
There are a few options for how the business interests can be divided during a divorce. These are:
- Co-ownership, where both spouses continue to own the business post-divorce. In amicable divorces, this might work, but it’s not a workable solution for the majority of closely held businesses in this situation.
- One spouse buys out the other’s interest. This allows one spouse who wishes to remain involved to continue working in the business. The downside of this is that if the spouse who wants to be involved. Arguments over valuation can also be problematic if you decide to go this route, so you should retain a valuation expert early on and ensure that an attorney reviews all agreements.
- The business is sold and the profits are divided. While this can be viewed as the most “equal” of all approaches, it can take some time to accomplish. Many business sales are complex transactions that require months to identify a buyer.
Each approach has pros and cons, and how the business is actually divided will depend on the circumstances of the case. Community property might seem like a matter of simple equitable division, but this brief article demonstrates just how complicated business matters can be when they intersect with divorce. Get a Texas business and family law attorney to help early on.