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What business owners should know about asset division

On Behalf of | Jul 10, 2019 | Firm News

Divorce is never simple. There is always a lot to think about, whether it be managing emotions, supporting your family or working through all the legal ripple effects. For business owners however, separating may be even more complicated.

That’s because in some cases, both spouses may own an interest in the business. That means it may be part of the division of assets just like other marital property.

Separate vs. community property

Texas makes a distinction between separate and community property in a marriage. What does that mean?

Separate property is generally either property a spouse owned before the marriage, an item gotten as a gift or through inheritance, money gained via separate property, or funds a spouse received because of a personal injury award. During a divorce, this separate property is not divided among the splitting spouses.

On the other end is community property. This likely includes most property obtained during the marriage, and it is considered co-owned by both spouses. During a divorce, it is community property the court divides among the couple.

How does this concept of community vs. separate property apply to a business? The same way it applies to everything else.

Is a business separate or community property?

If a business is determined to be separate property, it may be off limits to asset division during a divorce. If, however, that business is found to be community property, the judge will consider its value and each spouse’s interest in it the same way they would any other community property.

How do you know if it is separate or community? That’s a much trickier question than it may seem on the surface. One clue may suggest an answer: when the business was formed. If it was before the marriage, there is a decent chance the business remains separate property. If a spouse started the business during the marriage, it is likely community property.

There are a number of potential wrinkles to this however – simply knowing when the business formed does not provide a reliable answer.

How spouses might divide a business

If a business is determined to be community property, there are multiple ways to approach a division. Some possibilities include:

  • If spouses get along, they can choose to co-own the business
  • They may opt to sell the business and split the profits
  • One spouse could buy out the other’s shares in the business
  • One spouse could swap their interest in the business for other assets of value in the divorce

There are a lot of factors to consider when it comes to asset division in a divorce. Taking steps to determine whether a business is community or separate property, potentially with the help of an attorney, is often a solid starting point. Which next step is right for a separating couple will ultimately depend on their unique circumstances and goals.