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You worked hard to build your business. Now, you’re facing divorce and wonder what will happen to the assets you spent years growing. For many business owners, their company isn’t just how they generate income — it’s their passion, legacy, and life. Importantly, there are a few things an entrepreneur can do to ensure their business interests and assets are protected in the event of divorce.
Texas is a community property state. This means that any property or assets acquired during the marriage are owned equally by both spouses, regardless of which spouse’s name is attached to it. In other words, it does not matter whether a business belongs to one spouse or both. If it was formed while you were married, it would likely be considered community property subject to division in divorce.
In the event a business was founded by either spouse before the marriage, it will generally be characterized as “separate property.” Assets or property identified as “separate” belong to the original owner and are not divided in divorce. However, any contribution made by the other spouse to promote the growth of the business, expand its operations, or increase its value would be deemed community property.
It’s vital to understand that if a company is set up as a corporation or an LLC, only the interest in the business can be divided — not the specific assets. In a sole proprietorship, the assets will be divided individually pursuant to divorce. The type of company can also determine whether there are applicable limitations that should be considered during the divorce process. For instance, franchises and chains have specific ownership rules, and professional companies owned by doctors, lawyers, or accountants, cannot be owned by someone who is not licensed.
While no one wants to think about their marriage ending before it has even begun, business owners should take every proactive measure available to them in order to protect their interests and assets. A common way for entrepreneurs to shield their business from the impact of divorce is with a prenuptial agreement.
A prenuptial agreement is a legally binding document executed by both parties prior to the marriage. Specifically, a prenup can do the following:
A carefully drafted prenup can keep your business out of the divorce process entirely. In addition to protecting your business interests or assets, it can also help to avoid lengthy, contentious, and costly litigation.
Even if you don’t have a valid prenup, it’s crucial to be aware that postnuptial agreements are recognized and enforceable in Texas. Postnups are similar to prenups in that they can prevent your spouse from having a claim to your business assets. While they often contain the same types of provisions as prenups, postnuptial agreements are entered into after you get married, instead of before. In fact, a postnup can be entered into at any point in your marriage — regardless of whether you’ve been married for one month or twenty years.
Although a postnuptial agreement can address business assets that you had acquired before you were married, it’s critical to consider executing one if you start a company after you are married. Critically, at the first sign that your marriage may not be working out, it’s a good idea to talk with your spouse about executing a postnup. Not only can it protect your business assets from divorce, but it can help to shield your spouse from any debt you may take on in connection with the company’s operations. It can also help to insulate any of your spouse’s investments or contributions during the divorce process.
A Texas marital settlement agreement can be an effective way to deal with business interests or assets that must be divided in a divorce. Rather than let a judge decide the outcome of your divorce, a settlement is negotiated with your spouse and submitted to the court for approval. This can allow you to have greater control over what happens to your business and other community property.
It’s essential to keep in mind that compromise is always involved when entering into a marital settlement agreement. For example, you may have to let your spouse keep a larger percentage of other assets in exchange for retaining full business ownership interests. Typically, in these cases, you will need to obtain a business valuation to ensure a fair settlement is reached.
If you’re going through a divorce, it’s best to have an experienced attorney who can guide you through the process — and ensure your business assets and interests are safeguarded. Stacey Valdez is a board-certified Houston divorce attorney who is committed to providing high-quality representation and skilled counsel in even the most complex matrimonial cases. Schedule a consultation with Stacey Valdez & Associates by contacting us online or calling (713) 294-7072.