If you own a business and are facing a divorce, you might wonder if your spouse will have rights to your business. Will you have to divide the business with your spouse? Will you be able to keep running the business after the divorce? Adding one or more businesses to the division of property required by a divorce makes that process even more complicated. Who has property rights to your business and what happens to your business depends on whether it is judged to be “separate” or “community” property under Texas law, and whether you have entered into any agreement about how to treat the business in the divorce.
How does Texas divide marital assets in divorce?
Texas is one of nine community property states that view the assets accumulated during a marriage as community property owned by both spouses. Texas Family Code specifically defines the marriage relationship and the couple’s marital property rights as either separate or community property rights. To be separate, property must be owned by one of the spouses before marriage, or acquired during the marriage as a gift, by inheritance, or due to recovery for personal injuries during the marriage (excluding loss of earnings) (Sec. 3.001).
Some examples of separate property include:
- A house purchased by one spouse before the marriage
- A gift given to one spouse before or during the marriage.
- Contributions made by a spouse to their own retirement account before the marriage
- A spouse’s inheritance
- A spouse’s personal injury settlement
Community property consists of all other property acquired by either spouse during the marriage (Sec. 3.002). All property “possessed by either spouse during or on dissolution of marriage is presumed to be community property” owned by both spouses (Sec. 3.003). Therefore, unless a party establishes property is owned separately, the parties have agreed it is separate, or have entered into an agreement dividing property, it will be considered owned by both spouses. Characterizing property as separate or community property based on when it was acquired (before or after marriage) is referred to as the “inception of title rule.”
- A house or land
- A business
- Salaries and wages earned during marriage, even if earned individually, as well as unemployment compensation and payment for lost wages
- Savings and checking accounts, whether single or joint
- Contributions to a retirement account made from the date of marriage
Separately owned property is not divided during a divorce, but community property is divided between the spouses. Categorizing property as community property means the spouses own it equally but does not automatically mean the property will be divided 50-50. When entering a divorce decree, courts divide the parties’ estate in a “manner that court deems just and right, having due regard for the rights of each party and any children of the marriage” (Sec. 7.001).
Texas law does not define the terms “just and right.” The courts are left to consider the facts and rights at issue in the divorce to determine the division of the property. Some factors often highlighted include the needs of children, the size of each spouse’s estate, and any fault in causing the divorce.
Are businesses considered community property in San Antonio?
A sole-proprietor business will be considered community property if it was started after the marriage with funds earned during the marriage. That business will be considered separate property if it was started before the marriage with separate funds. However, the development and continuing operation of many businesses will not adhere to such clear before-and-after marriage lines. For example, a business may be started by one spouse before marriage, and then be brought into the marriage and operated as a family business, supported by the work and financial contributions of the other spouse. Or the spouse founding the business pre-marriage may invest income earned by the spouses during the marriage into the ongoing business. In these cases, and in many other instances of mixing before-and-after marriage assets, the separate and community property interests in the business will become mixed to a certain extent and will have to be teased out and characterized by the court.
To determine the separate and/or community, the court could consider factors such as:
- The date the business was started
- The source of the funds used to start the business
- The date of the marriage
- Financial contributions made to the business by spouses during the marriage.
- Labor contributed to the business by spouses during the marriage
- Any appreciation in value attributed to financial and/or labor contributions during the marriage
The division of business assets gets even more complicated if a business is identified as an “entity” under the Texas Business Organizations Code. Partnerships, limited partnerships, limited liability partnerships, and limited liability companies are considered entities under that code.
The assets owned by such business entities are not subject to marital property rules, because they are owned by those businesses. But if a spouse owns an interest in a business entity, the interest would be subject to division as marital property in a divorce, and the interest would have to be characterized as separate or community property depending upon when the interest was acquired
When San Antonio business owners divorce, or those in high-asset divorces with numerous interests in different business entities divorce, the identification or location and characterization of business properties are initial steps in the division of those assets. After those steps, the property still must be valued before the court can determine the “just and right” division of the property.
If you have an enforceable pre- or post-nuptial agreement, or other agreement about how to divide property with your spouse, the divorce process will be easier. Courts will generally accept agreements dividing marital property in a divorce proceeding as long as they do not adversely affect the right of a child to support. If you do not have an agreement, you may be able to negotiate an agreement as part of the divorce process.
What should I do if my spouse wants part of my business in a divorce?
Dividing marital assets is complicated. You should consider consulting a San Antonio divorce lawyer familiar with marital property division and how businesses are characterized and valued in divorce proceedings. A lawyer can protect your rights and business property interests during a very stressful and difficult time.
The San Antonio business divorce lawyers at Grable Grimshaw PLLC understand the importance of the division of property when a business is involved. Our lawyers can represent you throughout each stage of a divorce and division of property. We can help you through negotiations for an agreed division of property as well as represent your interests in court. Call 210-963-5297 or fill out our contact form today to set up a free, initial consultation with a member of our legal team.