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What happens when my business partner's spouse and I divorce?

In a community property state, it is more than your lives that become intertwined when you get married. Your property will also become one with your spouse's. Property that you owned before your marriage will remain separately owned by you and your spouse. However, most forms of income and property that are acquired, purchased, or owned during the marriage will be counted as community property. This property will be divisible in a divorce no matter whose income was used to purchase the property or whose name appears on the title to the document. Your home, vehicles, real estate, etc. The list goes on and on. If it came to be during your marriage, it doesn’t matter whose income was used to purchase it.

The description I just provided you with for community and separate property in Texas may sound simple- I did that on purpose- but once you get involved in the process it can become anything but. When spouses start to argue over property all sorts of different arguments can be made as to why a particular item should or should not be a part of the community estate. The date it was purchased, the funds that were used to purchase the item, and whether or not the reimbursement is a factors. These are just a few of the ways that the waters can be muddied when it comes to making arguments about community property.

What can happen to your small business in a Texas divorce?

Adding fuel to the fire is what often happens when two business-partner spouses get divorced. Not only are your life partners getting a divorce, but you are also professional partners who have a completely different relationship to untangle. Caught in the middle of that are employees, assets, the goodwill associated with your business, and clients who expect you to be able to deliver on contracts and promises for goods and/or services. This is, of course, on top of the relational and familial aspects of the divorce. You may be surprised to find that some parents fight just as hard for parts of their divorce as they do possession time with their kids!

To start, yes, your small business can be divided into a divorce. The question that we need to ask ourselves today is how the business will be divided and what method will be used to divide the business. Without a doubt, you have poured a lot of effort into building your business. Even if you weren't the primary worker/builder of the business then your marital property was utilized to build the business to what it is today. It may not feel like it’s “your” business if your spouse has been the one working in it for years but make no mistake you are invested in that business as well- literally and figuratively.

On the other hand, if you are the spouse who did most of the work to build up the small business then you are invested in the business and everything surrounding it a great deal. You aren't just in it to make money. You have relationships, emotions, pride and everything else wrapped up in this business. It is not going to be easy to think about losing part of it or even seeing your role diminished in the business depending upon what happens in the divorce process. However, that is the situation that you have before you and it is better to consider what the possibilities may be to be prepared, rather than to be surprised or caught off guard by the divorce.

However, with all the emotional equity you have poured into your business it is still an asset like anything else that you own. This means that you need to be able to balance those emotions with an objective outlook on the business and how it may be treated in your divorce. If your business was started during your marriage, then odds are good that it will be community property in your Texas divorce. As a result, you should prepare for things to change in the business. Perhaps not with the day-to-day operations but with how profits or other money associated with the business may suddenly become divisible.

The details of how your business opened its doors matter

When did your business open? How did you go about finding the money to open the doors? These are critical questions that you need to examine to determine whether the small business is going to be divisible in your divorce. You will have to look through old formation documents, dig up information on any loans that you took advantage of and trace back the funds that you used to open the business to determine how entangled with your spouse the divorce truly is.

It may be the case that your business will be separate property. This is true if the business was opened up before the beginning of your marriage. While there may be some details to iron out, it is with some confidence that we say that at least a part of your business will be separate property and thus not divisible by a family court judge. How much of the business and its impact on your divorce is a different subject altogether.

Let’s walk through some of the factors that a court would consider when dividing up a small business in your divorce. The value of your business at the time of your divorce matters as well as its value on the date you got married. Did the value of the business increase? Decrease? Stay about the same?

As I alluded to a moment ago, the funds that were utilized to help get your business off the ground matter. If your spouse started the business during the marriage but did so only with separate property funds, then he may have a case to keep that business separate property. For example, what if your spouse utilized a trust fund that was his before the marriage to take money from to invest in the business? If no community property funds were ever utilized within the business, then the business may well be separate property even though it was started during your marriage. This does not mean that you don’t have a claim for reimbursement in some way from the business, but the separate property nature of the business would seem to be strong for your spouse.

On the other hand, if it was all community property funds that went into building up the business then you would have to presume that the business is going to be classified as a community property asset. Even if the business is a family business that long pre-dates the marriage, if your community property income was utilized within the business then you may have a community property argument to make at least in part of the business. This may not make your spouse or their family very happy, but the family court judge will apply the law to your circumstances and the result may be that a portion of that business is subject to division or at least reimbursement in the divorce.

Are there other partners or contributors to the business?

If all of this wasn’t complicated enough, there is another situation that we should walk through involving business partners who are not you and your spouse. If you started the business with other people, then that will factor into how the business is divided in the divorce. The outside money of partners or investors will also need to be considered when determining what percentage of the business is separate or community property.

How can you and your spouse divide the small business?

If you and your spouse ultimately determine that your small business will need to be divided because of your divorce, there are multiple methods for you all to employ. The easiest, cleanest method for you all to utilize is to simply have one of you buy the other one out from their interest in the business. This will prevent the business from having to be sold and the funds utilized to pay each of you. The only trouble with this method is that you or your spouse will have to be able to come up with the cash now to pay the other person. Or, you all can come up with a payment schedule over time that will allow one spouse to have their interest bought out.

For instance, if you are going to pay your spouse their community property shares of the business and lack the cash to do so right now then you can pay her a good-faith down payment on the amount owed and then arrange to pay her the rest based on the profits earned by the business. If you promise to pay her 10% of all profits each month earned by the business that will peg the payment schedule against the success of the business. It will also ensure that she doesn’t do anything silly that could impact the viability and stability of the business down the road.

We see this type of situation arise most frequently when one spouse is very involved in the day-to-day operations of the business while the other is less involved or not involved at all. It is not a bad thing to be uninvolved in a small business owned by your family. However, it does bring into question what that spouse would do with an ownership percentage in the business after the divorce if he or she has never done anything within the business during the marriage.

On the other hand, if both you and your spouse are involved in the day-to-day operations of the business then the situation becomes a tad trickier. This can be an awkward situation to have two ex-spouses working together in a close environment. Now, your business may be one where you all work remotely for the most part and do not meet one another very much. In that case, it may not be an issue for both of you to continue to work in the business if your employees and customers are ok with that.

On the other hand, buying a spouse out of the business if you all work together in an office or shop environment may be for the best given the impact that the two of you working together may have on the business moving forward. Hopefully, you have mapped out potential changes and the impact that they may have on your business moving forward. Otherwise, you may be left in a position where you are struggling to fill holes and plan during and after your divorce.

One final option would be to divide up the business to allow you to take half and go on your way, and to allow your spouse to take half on go on their way. If your business already operates as two smaller businesses under the umbrella of a larger business, then this may be an especially good idea. For example, if part of your business produces a tangible product you could take that portion and start a new company. Your spouse, who had been handling, in-person engagement and live events could take that portion and run with it as a separate business. These are just hypothetical ideas, obviously, and are not something that you should necessarily transpose onto your case without first reflecting on the possible impacts on you, your spouse, and the business.

An even simpler arrangement would involve a business like a CPA firm or tax preparation firm. You could take the clients that you work with, and your spouse could take the clients that he works with. Of course, this would mean being transparent with your clients about the divorce, the nature of dividing up your clients, and the impacts of the divorce on the beginnings of your business. However, if your clients are ok with this type of arrangement and decide to hang around as clients of your new business then this could end up working out very well both for you and your spouse.

How well do you and your spouse get along?

Another option for you and your spouse to choose from involves continuing to work together even after the divorce. For many people, this sounds about as much fun as going to the dentist. However, for other people, this may be a great way to remain viable as a company and to continue to serve your existing clients without interruption. It all depends on what your relationship is like with your spouse. Even if it is not good now, you may also be able to anticipate healing in the relationship sufficient to keep working together as business partners.

This may be possible in a situation where the problems that drove you towards divorce do not involve the business at all. If you all had differing philosophies on parenting and that is what ultimately drove, you to get divorced then you may have seen the divorce as a necessity. Being able to have some degree of independence regarding parenting your child as you wish could have been just what the doctor ordered. Now you can look at your business with a clear vision and determine how to work within the business to shore up your existing customers and even expand the business if that is your goal.

Selling a small business as part of a divorce

Ultimately, you and your spouse may determine that as a part of the divorce the business needs to be sold. It may just be the right time to sell given the nature of the economy. Or you all may have been unable to figure anything else out when it comes to handling the business in your divorce. Sometimes selling the business, dividing the proceeds in whatever manner the two of you choose, and then going your separate ways is the best for everyone. It is certainly the "cleanest" of the options that we have discussed today.

There are some risks associated with selling a small business, however. For one, there is no guarantee that your business will sell. You may agree in your final decree of divorce to selling the business but that does not guarantee that you will be able to find a buyer. Selling a business can take time and may require the hiring of a business sales broker who can help you line up a buyer(s) for the company. The number of similar businesses in your area, the demand for those types of businesses as well as the goodwill aspects of your name in the community will all impact whether division will be a possibility.

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