Closely Held Businesses and Divorce – Part I

When you have worked hard to build your business, you don’t want to see it threatened when your marriage dissolves. A divorce proceeding involving a closely held business is a complex, sometimes volatile combination. Therefore, you need to protect yourself and your assets, so retaining a qualified divorce attorney is vital. Here’s what you need to know to protect your closely held business in a Texas divorce.

Is a closely held business community property?

Under Texas law, all or part of a privately held a business, may be considered community property in a divorce if it was created or acquired during the course of the marriage with community funds or assets. If so, then the business will be a part of the property that is subject to a division by the trial court in a divorce proceeding. However, if the closely held business interest was acquired before the marriage, or separate funds or assets were used to acquire the closely held business interest following the marriage, it is usually considered to be separate property and therefore will not be subject to division by a Court in a divorce proceeding.

What happens to a closely held business in a divorce?

If it is determined that a closely held business interest is community property, it is typically handled in one of three ways as a part of the property division in a divorce proceeding:

  • Buy out the other spouse – This option is the primary method on how a closely held business is handled in a divorce proceeding. Generally, the spouse who works in the business will retain ownership and he or she will pay the other spouse for his or her interest in the company. One potential drawback to this method is that the spouse keeping the closely held business interest, must have enough other liquid assets on hand to be able to buy out the selling spouse. However, if cash is a problem, the purchase price can be offset with other community assets in the martial estate, such as 401(k) assets or the equity in a home, or the retaining spouse may pay the selling spouse out over time.
  • Sell the business, divide the profits – The upside to this arrangement is that each spouse can take what they make from the sale of the closely held business and embark on their own business ventures. This leaves the parties with no business ties between them, although it can take time to find a buyer for a closely held business.
  • Co-ownership agreement – Although very rare, ownership of the closely held business continues as is, with both spouses continuing to have an ownership interest in the business. This works only as long as there is a great deal of trust on both sides and they are able to maintain a strong working relationship.

It is important to know Texas divorce law as it pertains to division of property in a divorce proceeding. Consulting with a qualified Dallas divorce attorney with a background in business formation(s) and valuation is important and will help you arrive at the fairest, most beneficial arrangement for you when dividing a closely held business during a divorce proceeding.

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