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The challenges of dividing a business during divorce

On Behalf of | May 24, 2024 | Asset Division, Divorce/SAPCR

Divorce is a challenging ordeal on its own. When a business is involved, though, the complexities multiply. For Texas business owners, understanding how the division of assets applies to their professional life is crucial.

How do Texas courts divide property in a divorce?

Texas is a community property state, which means that both spouses have equal ownership of the property, money and debt acquired during the marriage. If an entrepreneur founded their business during the marriage or if their spouse made contributions to the company, this could include their business. The courts divide this marital property according to what is “just and right.”

However, “just and right” does not always mean a 50/50 split, especially when it comes to dividing a business. The court might consider many factors during the division of assets. These include each spouse’s ability to provide for themselves, the length of the marriage and the amount of separate property owned by each person.

How much is a business worth?

One of the first hurdles in dividing a business during a divorce is determining how much the company is worth. This process can be contentious and complex, as it often requires professional appraisers and accountants.

These professionals may use several different methods to establish a business’s value. Some methods may use the value of a company’s financial holdings and assets. Some may use future earnings potential or market conditions like the sale price of other, similar companies.

How can you divide a business?

After valuation, deciding on the method of division presents its own set of challenges. Options include one spouse buying out the other’s interest, selling the business and splitting the proceeds, or continuing to co-own the business post-divorce. Each of these options comes with financial implications and emotional considerations, especially when one’s livelihood is at stake.

The division of a business is not just about assets; it’s also about liabilities. The court will also divide marital debt, which can include business loans and lines of credit.

For Texas business owners who are part of partnerships or LLCs, the process can be even more complicated. These business structures often have legal agreements that dictate what happens in the event of a member’s divorce. It is crucial to review any existing partnership or operating agreements, as they may have provisions that impact the division of the business.

Ultimately, the goal in any divorce involving a business is to reach a resolution that protects the business’s integrity while also ensuring that both spouses receive their just portion of the marital estate. This requires careful planning, an understanding of the legal landscape and a strategic approach to negotiation.