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Protecting your business assets in a divorce

On Behalf of | Jul 10, 2024 | Family Law

The property division aspect of a Texas divorce is often the most complicated. This is especially true if you are a business owner.

Texas is a community property law state. This means that all property you and your spouse have at the time you divorce is community property and must be divided between the two of you.

Community property can include a business. Texas law states that community property must be divided “just and right” between spouses. This does not always mean an equal or 50/50 split.

If you are a business owner, you may wonder how you can protect your business from the complexities of this law.

Is your business separate property?

Separate property is not divided in a divorce. This is property that you acquired prior to marriage that did not mix with marital property. If you owned your business before getting married there is a chance that it is not considered community property and it will remain yours in a divorce.

However, any increase in your business’s value during your marriage could be considered community property and be subject to division.

Here are some strategies to consider if you are in this situation.

Maintain separate business and personal accounts and keep detailed and accurate business records. Do not take actions such as borrowing from a personal account to pay business expenses or vice versa.

Pay yourself a higher salary. Paying yourself a lower salary could cause your spouse to claim that the remainder is community property, if you were putting it into retirement funds or other investments that are considered community property.

Consider alternative trade offs

Be willing to give up other assets to achieve the “just and right” division Texas law requires. If keeping your business is your goal, you may need to sacrifice other assets to your spouse.

Your spouse may agree to let you keep the business if they receive the house, retirement accounts or other assets. Propose this as a potential solution during negotiations.

If you do end up with a resolution or court order requiring you to pay your spouse a share of the business, see if you could make the payments over time. This is a common solution to avoid your business taking a major hit by having to pay a lump sum all at once.

Although it may be too late, one of the best ways to protect your business is with a pre-nuptial agreement. This allows you to specifically agree on terms for what happens to your business in a divorce.

Pre-nuptial agreement terms

A pre-nuptial agreement could state that any increase in value of the business remains separate property or contain an agreed-upon amount of compensation your spouse will receive as part of the value of the business in a divorce.

If you can get a pre-nuptial agreement in place before your divorce proceeding begins, make sure to review and update it regularly. Terms that were initially fair to you might be unfair if your business has changed since then.

Protecting your business in a divorce requires careful planning and guidance. You will need to make some difficult decisions, but by understanding the protective measures you can take, you are in a better position for your business to continue to grow and succeed post-divorce.