Does the end of your marriage have to mean the end of your family business? Not necessarily. In Texas, with careful planning, the right team and a little luck, a small family business can survive separation and divorce.
The outcome of a divorce depends on the facts and circumstances of each individual situation. No blog post can tell you everything you need to know about small business and divorce, and no blog can substitute for professional, case-specific legal advice. But in this two-part post, you'll learn the five things you must know about what can happen to your small business when you get divorced.
Part one discusses how to protect the business while you and your spouse are still together and, how the courts decide who a small business belongs to. Part two covers business valuation and business survival during and after a divorce.
1. Plan ahead
The best way to help your business survive after a divorce is to protect it before the divorce. There are several approaches. First, you can use a prenuptial or postnuptial agreement to set out who gets the business if you get divorced. If you go this route, be sure your spouse is represented by an attorney who reviews the agreement before your spouse signs it.
An alternative to a prenup or postnup is a buy-sell agreement, which is common in partnerships between partners who aren't husband and wife. A buy-sell agreement sets out what happens to a business if one partner dies, become disabled, wants out of the business or gets divorced.
Finally, if you are patient enough to wait up to seven years before you get divorced and you want to protect your business for your children, you may be able to transfer the company to an asset protection trust. Trusts are usually thought of as estate planning tools, but a trust can also protect your small business in a divorce.
Alas, these resources are most useful when you and your spouse are not yet married or are getting along well. If it's too late to plan ahead and you're headed for divorce, the first thing you need to know is who really owns your business.
2. Whose business is it, anyway?
When a court is deciding whether a business is the separate property of one spouse or the marital property of both spouses, timing is everything. Again, divorce laws vary from state to state, but generally speaking, separate property is property that you owned before you got married. A business can also be "separate" if you inherited it or if you purchased it with money you received in a personal injury lawsuit for your pain and suffering.
Typically, if you already had your business when you got married, the premarital value of your business is considered your separate property, but the increase in the value of your business during the marriage is considered marital property. If you started the business after you got married, the entire business is marital property.
3. Property Division
Nine states--Texas among them--are Community Property states, where both spouses own the marital property equally. This is where luck comes into play. A 50-50 split of marital property is the default property division when a couple gets divorced in a community property state. The other 41 states follow an equitable distribution scheme, where case-specific factors determine who gets what in a divorce.
Now that you know something about who really owns your business and what claims your spouse can make to ownership, part two will get into how courts determine the value of a small business and how they divide it.
Forbes: "Five Steps a Woman Can Take to Help Her Family-Run Business Survive Divorce," Jeff Landers, Nov. 15, 2011