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Partnerships, sole proprietorships and other topics related to small business and divorce

Do you or your spouse own a small business, either together or independently? If you do and are also marching quickly towards a divorce it is likely that you do not know nearly as much about how the law treats businesses in the context of divorce in Texas.

With that in mind, the attorneys with the Law Office of Bryan Fagan, PLLC would like to share with you some information on this subject. While we cannot present every issue that you may encounter in your case in this sort of platform, we hope that today and yesterday’s blogs will offer you some valuable food for thought.

Are partnerships subject to having their veil pierced?

When I say “veil pierced” I am referring to the idea that individual shareholders of a corporation can be held directly accountable for a corporation’s actions in limited circumstances. This is commonly referred to as piercing the corporate veil because in large part corporations are set up as limited liability entities that protect the individual shareholders from legal responsibility if the corporation were to be sued.

As opposed to corporations, partnerships are not subject to the same piercing. In partnerships, the general partner is always liable for the obligations and debts of the partnership as they pertain to third parties. There is no protection for the partners from third parties and these folks can attempt to recover any losses suffered directly from the general partner.

The Limited Liability Company as a combination of a corporation and a partnership

Combining aspects of a corporation and a partnership, a Limited Liability Company (LLC) offers greater protection for individuals within the LLC.

A piercing of the corporate veil is possible though I am not familiar with it having ever occurred in the context of a family law case in Texas.

Sole proprietorships

If you own all the assets in a business and are subject to all the liabilities associated with business as well then that is called a sole proprietorship. Sole proprietorships are created under your social security number and as a result, are treated as if you and the same entity. The assets of your business are treated just the same as the property you own in your personal residences. Loans that you have taken out in the name of your business are treated as a personal loan making you and your spouse responsible for their repayment.

Any money that is earned or income that is generated from a sole proprietorship is presumed to be community property just as any income that you would earn from a job working for any other business would carry the same presumption. If you have utilized your separate property to fund a portion of the community estate you can argue for a reimbursement of these monies in the divorce.

What are your property rights to a sole proprietorship in a divorce?

In the context of your divorce, you will own distinct types of property interests in your sole proprietorship. The first and more logical is the ownership interest in the business. This right stems from your owning the business as an extension of yourself. The equipment, inventory and other materials utilized in operating the business are also a property right that you will own.

Keep in mind that if you create your sole proprietorship during the course of your marriage that it can never be considered separate property.

The reputation that you possess as a business owner may cease to be in the event that you sold your interest in the business as a result of your divorce. For example, if your customer base is largely made up of people who utilize your services due to your being associated with the business then this is what I mean. When determining the value of the business you should not take into account your personal goodwill. The reputation of the business as a whole would be relevant and should be included in any valuation estimates when discussing them with a buyer.

In separate personal goodwill from the goodwill associated with your business, you must first figure out whether or not that goodwill exists independently from you. If your abilities and reputation as a business owner cannot be separated from the general nature of the goodwill of your business it cannot be said to add value.

In the context of a business owner going through a divorce that goodwill that is attached to your business and not to you as a person but has some sort of value that increases the value of your business. If it does then your spouse will have a community property interest in that goodwill.

How will your business be valued in a divorce?

If you were to value the business by looking at tangible assets where they are appraised at their market value (with liabilities subtracted) then you would be using an asset approach to valuing the business.

A second manner of valuing your business would be to look at the income generated by your business now and in the future and to determine a value based on how much an investor could reasonably expect to receive as far as future streams of income.

Keep in mind that if you own a sole proprietorship that there are no assets that can be utilized in order to value your business. Goodwill associated with your business can be valued. Often times in a situation where a trial is necessary for the context of a divorce both sides will hire expert witnesses to testify about the value of a business. Expert witnesses can often time be very expensive to retain and you and your spouse would be well served to attempt to settle your case prior to trial in a mediation setting.

Often times you are able to negotiate a better outcome than you would stand to receive in a trial even on your best day. Mediated Settlement Agreements are often times more flexible than judgments from a trial. After all- nobody knows your business like you and your spouse do.

What to think about in terms of your business once the divorce is finalized?

While your marriage may have come to a conclusion with the signing of the Final Decree of Divorce, there are still issues to be considered in relation to your business depending on what the Decree looks like.

Are you going to continue to be a part of your business even after the divorce is finalized? If so you and your spouse may need to come to an agreement on how the business will be operated especially if both of you will remain a part of its day to day management.

If you and your spouse co-owned the corporation prior to your divorce it may make sense to re-draft any corporate documents that evidence this fact. You do not want to get into a situation where your originating documents are now out of date due to a change in your personal life. Take the time to decide if this is in your best interests moving forward.

Working with a family law attorney is essential to navigating your divorce case

As you can tell from today and yesterday’s blog posts a small business can complicate a divorce even more than it would be ordinarily. With this in mind, you will want to have an advocate by your side to help you walk through your case, discuss your options and ultimately decide what is best for you and your family.

The attorneys at the Law Office of Bryan Fagan, PLLC stand ready to offer you that sort of representation. We have successfully advocated for many clients whose small business was at the heart of their case. We pride ourselves on our performance inside and outside of the courtroom and have proven results that we are happy to share with you.

To learn more about our office please do not hesitate to contact us today. We offer free of charge consultations with licensed family law attorneys six days a week. It would be an honor to speak to you about your circumstances.

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Law Office of Bryan Fagan, PLLC | Business Owner Divorce Lawyer

The Law Office of Bryan Fagan, PLLC routinely handles matters that affect children and families. If you have questions regarding Business Owner Divorce Lawyer, it's important to speak with a Business Owner Divorce right away to protect your rights.

A Business Owner Divorce Lawyer is skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact Law Office of Bryan Fagan, PLLC by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan, PLLC handles Divorce cases in Spring, Texas, Cypress, Spring, Klein, Humble, Kingwood, Tomball, The Woodlands, Houston, the FM 1960 area, or surrounding areas, including Harris County, Montgomery County, Liberty County, Chambers County, Galveston County, Brazoria County, Fort Bend County and Waller County.

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