Do you own your own business? For many of us, the idea of owning our own business is the quintessential American Dream. Entrepreneurism and going out on your own to earn a living and provide a service to your community can be one of the most fulfilling aspects of a person's professional life. The ability to work for an employer like the Law Office of Bryan Fagan has allowed me to see that firsthand. Mr. Fagan has grown his law practice into what it is today from a minimal operation that focuses intensely on customer service and client matters to a larger operation that focuses on customer service in client matters first and foremost.
If you have spent time, money, sweat, and everything in between on a business, then you know the sacrifices it takes to be a success in the world of business. As competitive as it is in the economy and as difficult as the past year has been due to the government LED restrictions on the economy, you may have felt like you have spent the past year fighting for your life in that of your business when it comes to staying open and viable. Add onto that concerns regarding the health of your employees and your customers, and 2020 and 2021 have indeed been unique years, to say the least.
What if you were also facing a divorce? After considering your children in your relationship with them, your mind may have immediately drifted towards concerns over your business. Friends and family members may have told you horror stories about how to protect your business and the consequences if you do not. In contrast, you do not want to be unfair to your spouse in the divorce; you also want to protect your business and ensure it is viable now and into the future. You may even have plans in the long term for your children to take over your business from you in the future. If something negative were to happen to the business right now, then those dreams will be dashed.
Preparing for divorce as a business owner looks like preparing for a divorce as if you were any other type of person. You need to be intentional about your decisions, and you need to be focused on your long-term goals. The main difference as a business owner is that you need to pay especially close attention to how the business is treated in the divorce and how your spouse is approaching the issue. If your spouse is a part of the business or has actively contributed to it somehow, the divorce will likely cover dividing up responsibility on the business in some way.
That is what I would like to discuss with you today. I have 6 pieces of advice to give you as far as protecting your business in a divorce. I don't want to give you the idea that your spouse will be clawing at you to get a piece of your business in the divorce, but there are Community property aspects to the equation that you need to be aware of. Overall, this advice is not meant to be a one-stop-shop for you as far as advice on divorce is concerned but it is more or less intended to jumpstart you and get you focused on some of the more important issues that you may be facing in your case.
Understanding the basics of community property law in Texas
When it comes to dividing property in Texas divorce, an essential piece of information for you is that Texas is a Community property state. This allows us to distinguish Texas and most other states in our country regarding marital property. It is presumed that you and your spouse own all property that is in existence at the time of your divorce. This does not mean that the presumption holds that you own 50% of a vehicle and your spouse owns the other 50%. The presumption is that each of you owns the vehicle completely.
Logic would dictate that the vehicle in question would then have to be divided up in some fashion or sold in the divorce. That is where divorce negotiations come into play. You and your spouse will go through a series of negotiations covering your community the state. Additionally, both you and your spouse likely own separate property, as well. This separate property covers any property owned by you and your spouse before your marriage; since there is a presumption that all property owned by you and your styles at the time of your divorce is a community in nature, then you should be prepared to prove the separate nature of property if that comes into question during your divorce.
There are many circumstances at play in a divorce when figuring out how Community property is divided. Factors like your ages, educational levels, ability to earn an income individually after the divorce, and the nature of your separate Estates in the roles that each of you played leading to the breakup of your marriage will all be considered if your case were to go before a judge. These factors also influence how you and your spouse will negotiate with one another even if your case never went in front of a judge.
Your business is just another example of a piece of property that could be classified as either your Community property or a part of your separate estate. Depending upon when the business was created, what funds were used to finance operations, and your spouse's involvement in the business itself, you could be looking at your divorce centering around the business and its finances. For that reason, you should be looking for an attorney to represent you in your case who has experience in handling matters related to business and divorce.
Is your business community or separate property?
The second piece of advice that I could give you regarding small business matters and divorce is to determine whether your small business is a part of your community a state. If the business is likely to be classified as Community property, it is subject to division in your divorce. However, if the business is more properly classified as separate property, it will not be divided by a family court judge. However, you should still collect evidence and information to prove the separate property nature of the business.
If your business is properly classified as Community property, then, like any other piece of Community property, both you and your spouse are entitled to a portion of its value at the time of your divorce. That means determining the value of the business will be essential when it comes to properly attend to issues regarding both Community property and your business. While you may have a general idea of what you think the business is worth, you will likely have to obtain an estimate from someone experienced in appraising and valuing small businesses in your area.
Work to determine the value of your small business.
As the third piece of advice, I would recommend that you work to obtain an accurate assessment of your business's value. Again, if you work inside your business every day, you probably have an idea of what accounting looks like, what you pay in taxes, and what your business assets are worth. Well, these are factors that play into valuing a small business for divorce; there are likely aspects that you are missing that a divorce court will be looking towards to get an overarching assessment of what your business is worth.
Fair market value is what a willing buyer would pay to purchase your business from a willing seller, namely you and your spouse. At the outset of your divorce, you and your attorney should work to find an experienced business appraiser to obtain an accurate assessment of what the business is worth. Not only is obtaining an accurate appraisal of the business important for matters related only to the business, but the value of the business will be added to the value of your community estate as a whole. The whole structure of your case from the standpoint of dividing up marital property can hinge on how your business is valued.
Not only do you have to take into consideration the assets of your business, any goodwill associated with your name or the name of your business, and your list of clients, but you also need to consider any liabilities and debts your business may have obtained along the way, for most of you reading this blog post debt associated with your business or debts owed by you and your spouse. Most creditors and banks do not lend money to small businesses. Rather, they lend money to you as an individual and will look to you for repayment even if your business does not continue to operate.
One thing to note is that even if your business is classified properly as separate property, it may be that any increase in the value of your business counts as Community property. Consider a situation where you brought your business into your marriage as separate property. If the business was valued at $200,000 at the time of your marriage, it has now increased to be worth $400,000, then the increase in value might count as Community property.
What are your goals in this divorce?
When it comes to goal setting for divorce, I like to tell people that nobody wanders out of a divorce and achieves the result they want. A couple of months ago, I was guessing most of us watched the Super Bowl as Tom Brady won his 7th Super Bowl ring. When Brady was interviewed after the game, he didn't have a glazed-over look in his eyes like he just sleepwalked through the entire season. Rather, he had objectives in mind and acted intentionally towards achieving this goal.
I'm not saying that you need to approach your divorce like it's your Super Bowl, but your divorce is important to you. There are so many factors in play in so many circumstances that you need to be aware of during a divorce that not focusing on your goals and acting intentionally towards achieving them would be a major mistake. Not only do you need a map to achieve your goals, but you need a compass as well. An attorney can offer pointers and perspective, but you are the racecar driver, and the attorney is the person who gives direction.
What do you want to see happen with your business in your divorce?
For instance, do you want to sell the business in the divorce and then split the proceeds of the sale with your spouse in some way? There are so many factors that may go into play when it comes to making this particular decision. If you and your spouse play an active role in running the business and you cannot see working together after the divorce or buying the other spouse out, this decision may be the best for you and your family.
Next, you may be willing to work with your spouse after the divorce in the business. This decision may not work well for you and your spouse if you are not on speaking terms and do not anticipate getting to that point. One of the worst decisions you could make would be to agree to do something like this unless you are confident and can work well together. The other factor that you need to be aware of is what your business will operate like with two divorced spouses operating in decision-making roles. Or, would you be comfortable working for your ex-spouse in a workplace scenario?
Another option you may be able to take advantage of is buying your spouse out of their portion of the business to allow you to remain on as owner in full. To do so, you would either have to have the cash available or have assets in place to trade for an ownership stake in the business. A third choice would be to sign a contract with your ex-spouse paying them a share of your profits for as many years as it takes to pay them the agreed-to amount. Finally, you may be able to take out a loan to pay them their share immediately. However, this is not an option that I would recommend you looking into, especially if you are already financing some aspect of your life during this divorce.
Work with your spouse to create an outcome that is advantageous for both of you
the fifth piece of advice that I could give you about protecting your business in the divorce is to consider your role in creating and running the business. For instance, if your spouse had nothing to do with the business's creation or operation, they should not be pushing for any ownership or working interest in that business after the divorce. Weather color their interest in the business should purely be financial given its placement as part of your community estate.
With that said, you should evaluate things from your spouse's perspective and work with them to be reasonable in dividing up the business. It makes no sense for them to try and push for any ownership or stake in a business that, to that point, they are nothing to do with. Rather, the business's long-term future would be better off in your hands, with them receiving a fair share of the community estate portion of that business.
Do not be afraid to seek advice or counsel about the business.
Many small business owners that I know take a great deal of pride in operating the business. The business is like another child to them, and they are prideful of their role in its creation. If you know that the business plays a central part in your life, you may need outside counsel to help you view the business and everything attached to it objectively. This is where having an experienced family law attorney and an accountant who can effectively value your business becomes invaluable.
Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultation six days a week in person, over the phone, and via video. These consultations can go a long way towards helping you learn more about the world of Texas family law and how the filing of divorce may impact your family's circumstances for a child custody case.