If you are a business owner going through a divorce, understanding your rights with regard to keeping your business will be a critical aspect of the process. Your rights will depend on a number of different factors and regardless of the default rules that apply, you may still have options for negotiating sole ownership if your spouse would otherwise be entitled to a stake in the company.

In this article, we provide an overview of some of the key issues that come into play. For a thorough evaluation of your individual circumstances, we encourage you to schedule a free consultation.

Is Your Business Community Property or Separate Property?

The first question that needs to be answered is whether the business constitutes “community” or “separate” property. Under Texas’s community property law, with only limited exceptions, any assets that either spouse acquires during the marriage are deemed to be community property. In general terms, this means that both spouses are entitled to a share in the event of a divorce. Importantly, an ownership interest in a business acquired during the marriage will be deemed community property even if only one spouse is named as the shareholder, partner or member.

However, if you owned your business before you got married, then your ownership interest will be classified as separate property. Unlike community property, separate property is not subject to distribution in a divorce. There can be several complicating factors – including issues around salaries, reinvestment of business proceeds and your spouse’s participation in the business – that require careful consideration.

What if the Business is Community Property?

If your business is community property, a few things can happen when your marriage comes to an end. If you and your spouse are able to work together in your divorce, you may be able to reach a mutually-agreeable resolution. If not, you will need to fight for your desired outcome in court. Broadly speaking, three of the most common outcomes are:

  • Continuing joint ownership. If your spouse doesn’t work in the business, or if you and your spouse are still able to work together, it may be an option to continue as you were. This option should only be undertaken with careful planning and appropriate documentation.
  • Selling the business and dividing the proceeds. If you and your spouse cannot work out a resolution, selling the business may be the only option. However, this carries obvious challenges on its own, and it may take a long time to find a buyer. This also creates additional issues around what to do in the interim.
  • Buying out the business. The third option, and the one that often makes the most sense, is for one spouse to “buy out” the other’s share in the business. This can be done through the divorce process, with one spouse giving up rights to money or other property in exchange for full ownership of the company’s assets or ownership interests.

Do You Have a Prenuptial Agreement, Postnuptial Agreement or Governing Document?

Finally, keep in mind that you and your spouse may have already determined what will happen to the business through a prenuptial agreement, postnuptial agreement or other contract that governs the ownership and management of the business. For example, your prenup or postnup may provide for one spouse’s sole ownership, or a partnership agreement, shareholder agreement or member agreement may outline the rules and procedures for transferring shares or winding up the business’s affairs.

Contact a McKinney Divorce Attorney at Nordhaus Walpole PLLC

If you would like more information about how to protect your business in a divorce, one of our attorneys would be happy to sit down with you for a free initial consultation. To schedule a time to speak with an attorney at our offices in McKinney, Texas, please contact us today.