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Dividing Closely Held Business Ownership in a Texas Divorce

Aside from the typical property division issues involved in divorce, there may be a business interest that both spouses may be entitled to share. This includes a stake in a closely held company, even if only one spouse is the actual owner.

Texas is a community property state, which means that all property acquired by either spouse during the marriage is considered to be half-owned by the other spouse. The initial issue to be determined is whether the business in question is community property or separate property. That requires examining, among other factors, whether the business was started before the marriage, where the money came from to buy or start the business and how much the business grew during the marriage.

Once the business is deemed community property, its value must be ascertained. The value of a small to medium size business often depends on intangibles like good will and marketplace setting. Fortunately, there are many professional appraisal services that can inspect a business and provide an opinion as to its fair value. However, if each spouse hires their own appraiser and their estimates are far apart, a mediation or other dispute-resolution method may have to be employed to come to an agreement.

Once the value has been determined, the parties must decide how to divide the business as a marital asset. Although each spouse is entitled to half, selling the business and dividing the proceeds may be inadvisable, at least in the short term. Since a closely held business’s value is usually tied to customer trust in the people running it, selling the business may have a crippling effect on trade.

A more prudent course of action is for one spouse to keep operating the business and to buy out the other spouse. But this requires having enough cash and other assets on hand to accomplish the buy-out or arranging for a staggered payout over time. In the latter case, the receiving spouse will normally be given supervisory rights in the business in order to protect his or her investment.

Another alternative is to allow the business to continue operating normally until an optimal sale to a third party can be arranged. This requires the spouses to enter an agreement governing management of the business in the interim, including compensation to the non-managing spouse, and distribution of proceeds once a sale occurs.

Division of business ownership during a divorce presents challenging but not unsolvable problems. The spouses’ decisions have implications for their financial and estate planning, including tax liabilities. Working out differences becomes easier when both spouses understand that preserving and maximizing the value of the business is in their mutual best interest.

Hayes, Berry, White & Vanzant, LLP assists North Texas clients with every aspect of the divorce process, including property valuation and division issues. Call us at 940-230-2386 or contact us online to make an appointment at one of our offices, located in Denton, Flower Mound, and Gainesville.

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