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Business Assets In Texas Divorce

The state of Texas is home to a multitude of businesses, both large and small. Businesses are the core of Texas’ great economy. But how does a Texas court handle a business asset should a marriage dissolve?

First – Is the business part of the community estate?

Texas is a community property state. Only property, including business assets or companies, that were accrued or created during the marriage are subject to a division by a Texas divorce court. If a company or business was created prior to the date of marriage then that asset the spouse’s separate property and is not subject to any sort of division during the divorce proceeding. If the date of creation/inception of the business asset is murky, the spouse claiming it was created prior to marriage will need to provide their legal team with any relevant documents that evidence its date of creation. The burden is on the spouse claiming an asset is separate property to prove to the court that it is in fact separate property.

Second – What type of business is it?

Small companies or sole partnerships with little revenue or business assets such as equipment are often easily dealt with in a divorce settlement. If a spouse owns a sole proprietorship with minimal tools or assets of value, then the business entity and its accounts almost always go to that spouse as there is little relative value to the non-involved spouse. If a company is profitable because of the ownership or face of the company, its “goodwill value” generally goes along with the owner and there may be minimal actual property value to the company itself.

Large Business or Corporation

If the contested asset is a large business or corporation with ample assets or corporate stock, then one spouse can be awarded the entity itself while the stock is sold for liquid assets to be awarded to the other party.  For a majority of companies in a contested divorce, it will be important to obtain a business valuation. Unless it’s a publicly held company, whose value is based on its stock, it can be difficult to ascertain what a company is worth. As business valuation will compare the company to other companies in a comparative market analysis or it will examine the company’s assets, debts, existing contracts and make a determination on the company’s worth. These valuations can help the parties or the court determine the value of the company for purposes of fairly dividing the entirety of the community estate.

Rules and Limitations

Certain companies, like a franchise restaurant or chain, have ownership rules and limitations, so the parties, their legal team, and the Texas family law court will need to keep that in mind. A professional company, like an accounting firm or a physician’s office, cannot be owned by a non-licensed professional. So, the type of company may determine what limitations, if any, would be in place relating to its division in a Texas divorce.

Third – What if the business is jointly owned or both spouses are involved?

This can make an already contentious divorce even more complicated. Often times it is impossible to split the business in a way that both sides can continue to profit. The Texas family law court system does not want to derail a company’s financial prosperity by butchering its business structure. In this situation, the presiding court will do its best to come to a reasonable property division without destroying a business by dividing it. This may be done be awarding the entirety of the business to one spouse will awarding all real property and retirement to the other spouse. This can also be accomplished by ordering the spouse who is awarded the business asset to pay the other spouse their community interest in the business via a structured payment schedule.

Profitable Businesses with Strong Valuations

If the business is profitable and has value (that is not specifically attached to one of the spouses like a CPA or medical professional) then it may be easiest for the business to be sold and the proceeds split between the parties. This helps the court to avoid determining which spouse “deserves” the company and is an easy way to fairly split the business proceeds.

Considering Joint Ownership

Some Texas businesses are run by amicable spouses that have no desire to change the business structure or award the entirety of a business asset to one spouse in the divorce. Can a divorced couple continue to jointly own an operate a business? The answer is yes, but typically only if the parties both expressly desire this and believe it will work in the long run. A Texas family court does not want to force parties who have no desire to remain married to one another to remain as business parties. If a party requests in their divorce pleadings that the business asset or entity be split, a Texas family court will likely do that. But if the parties are amicable and believe they can harmoniously continue to operate the community property asset, then a court may award each party a fifty percent ownership stake in the entity. Once the divorce is finalized, any subsequent business decisions, such as selling ownership share, would be handled like any other jointly-held business interest.

To learn how business assets are handled in a Texas Divorce, Contact Us Today!

As one can see from above, there are a multitude of ways that a Texas court can divide business assets in a divorce. Each case is unique and comes with its own complications, so it is important to meet with a licensed Texas attorney who has experience in valuing and dividing business assets during the divorce process. The team at the Ramos Law Group, PLLC has experience handling all sorts of business entities and assets and can review your circumstances and assist you in formulating a strategy.

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Guide To Divorce In Texas

Today’s business owners are not the mom and pop type of yesterday. They must be business savvy, up on market trends and vigilant about their social media presence. A divorce can have a devastating effect on a thriving business if not handled correctly. A business owner contemplating a divorce in Texas should consider the following items before beginning the divorce process.

Community v. Separate Property

The first concern for any Texas business owner is to determine the characterization of any company. If the company was created or purchased prior to the date of marriage, or if it was inherited during the marriage, then it is considered separate property and is not subject to division during a Texas divorce. The spouse that owns that separate property must provide documentation evidencing that it was either inherited or created prior to the date of marriage, so a business owner will need to provide to their legal team documents evidencing the business’ date of inception.

If the company or business was created after the date of marriage, then it would be considered community property. This means that the entirety of the business (including assets, revolving contracts, bank accounts, equipment, etc) will need to be divided in the divorce.

There are circumstances where a business can be both community and separate property. For example, a person may have owned an interest in a business prior to marriage and after the marriage bought out a partner. This would result in a portion of the business clearly being one spouse’s separate property while the other ownership interest would be subject to a just and right division by the court.

Business Valuation

A major question for any business owner going through a Texas divorce is probably “what is my business worth?” If the company or business is part of the community estate, it is vital that an accurate

There are several methods of determining the value of a business entity. Any method or combination of methods may be used to calculate the value of a business entity. There is no required formula

  1. Fair Market Value – this is the value based on what a buyer would be willing to pay in cash to acquire the business.
  2. Book Value – this number is calculated by reviewing the finances and accounts of the business. This number is not always the most accurate as it only reviews a snapshot of the existing finances and does not account for growth.
  3. Comparative Market Analysis – this value is calculated in a similar manner to real estate comps. The business valuation expert will compare the business to similar types of businesses that have recently sold and estimate what the business in question will sell for.

As one can imagine, the above business valuation methods can have a range of different estimated values. This is why it is important to hire a knowledgeable business valuator who has experience in the market and type of business. If the value of the business is contested, both spouses may hire their own expert valuators and can present their dueling values at trial. The judge will then hear all the evidence and expert’s testimony and determine the value for purposes of property division.

Business Operation During the Divorce Process

A savvy business owner is going to want to make sure the day-to-day operations of the business entity are not negatively affected during the pendency of the divorce. Warring spouses can have a negative effect on the operations of a business, including mishandling of bank accounts and income, canceling accounts, harassing employees or other damaging actions. If the parties cannot mutually agree as to how the business runs and income is split during the divorce process, the court may need to issue some temporary orders. These can include injunctions prohibiting the harmful actions listed above, directions as to who handles the books and has access to the bank accounts. These agreements or orders from the court can keep the business running as usual until it is formally divided or awarded to one spouse.

Additional Concerns

There may be other specific business concerns that will need to be addressed. These can include:

  1. Are there additional owners to consider?
  2. Does the business have a buy-sell agreement in place that would prohibit a sale or awarding part of the business?
  3. How is the business structured? If an LLC, there could be procedural concerns with the articles of incorporation.
  4. Mixing business expenses with personal expenses. This could have an effect on the spouse’s income for child support calculation purposes.
  5. Is it a professional business such as a law firm or medical practice? Professionally-licensed businesses typically cannot be sold or awarded to an unlicensed spouse.

How a business entity is handled in a Texas divorce can be complicated and it is important for a business owner to make sure their divorce case is in the most capable hands. The Ramos Law Group, PLLC has handled a multitude of divorces involving business entities. The legal team has experience with business valuations, large corporations, small sole partnerships, and embittered spouses warring over the running of a business. Any Texas business owner contemplating a divorce should contact our firm to discuss strategy and long-term goals for the business.

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Hidden Assets in a Texas Divorce

Whenever a person is going through a divorce, it is often their main goal to obtain the best property division possible. This can help the healing process and set that person up for success in the next chapter of their life. Unfortunately, many people find that while going through a Texas divorce, their spouse may have been hiding assets throughout their marriage or are attempting to hide assets now that a divorce is pending.

It is vital to find an experienced family law attorney licensed in Texas who has a background in successfully finding hidden assets and getting the best property award for their client. The Ramos Law Group and its team of legal specialists are skilled at knowing what to look for and identifying hidden assets. What considerations are there when thinking about hidden assets in a Texas divorce?

First, a quick refresher on community property. As Texas is a community property state, any and all assets that were earned during the duration of the marriage are subject to a just and right division in a divorce. This does not include any items that are separate property, such as items owned prior to marriage or items received through a gift or inheritance. This article is assuming any “hidden assets” are community property and should be divided by a divorce court.

Discovery and Disclosures

There are a couple ways the parties are required to disclose assets in a divorce proceeding:

  1. Local Disclosures – For example, the Harris County family court system requires that parties disclose paychecks, tax returns, bank statements, and a sworn inventory and appraisement by a certain date. A sworn inventory and appraisement is a notarized/verified document that is supposed to contain an accounting of ALL property, including all assets and debts, with supporting documents showing current statements. Should the divorce matter go to trial, the trial judge will rely on the parties’ inventories when making a final property division.
  1. Written Discovery – The discovery process is where a party sends the other party written requests for tangible documents. These requests can go back to the date of marriage (which is when the community property would begin accruing) and can cover paychecks, bank statements, retirement statements, PayPal/Venmo histories, credit card statements, HSA accounts, stocks, bonds, etc. Any type of property or account history may be requested.

Using the documents received from either disclosures or discovery, a competent family law attorney is able to pinpoint any discrepancies or suspicious transactions that may point to hidden assets. For example, if a party is getting cash advance on a credit card that can be detected by looking at credit card statements. Or if paychecks show automatic deposits being made to multiple bank accounts. In this technological world where everything is traced, it is becoming exceedingly difficult to hide property and the tools discussed above are often used to find any hidden or undisclosed assets.

Forensic Accounting

But what if your spouse is smarter than the average spouse and it appears they have successfully hidden community assets? If that is the case, then your legal team can hire a forensic accountant. This is a CPA or accountant who specializes in reviewing accounts and financial documents to pinpoint suspicious activity or trace the whereabouts of missing funds. Forensic accounts are well-versed in tracing items like offshore accounts or cryptocurrency.

A forensic accountant is also helpful in determining a spouse’s actual income. Often a spouse will attempt to deflate their actual income to help reduce their child support or spousal support obligations. A forensic account will review their paychecks, tax returns, bonus structures, compensation packages, and any other documents evidencing income and actually compare to see if their stated income is accurate. This method is especially helpful when dealing with self-employed spouses who can commingle their personal and business expenditures to show a reduced income.

What if Hidden Assets Are Discovered?

The Court has several methods of dividing community property and if a spouse is determined to have hidden assets or attempted to defraud the community by hiding assets, the Court may do any of the following:

  • Awarding a spouse all of the previously hidden assets (or awarding the innocent spouse any nondisclosed assets not specifically awarded in the decree);
  • Finding the sneaky spouse in contempt of court and awarding attorney fees to the innocent spouse.

There is a statute of limitation of two years on any assets discovered after the divorce has been finalized. So if your divorce was recent and you discover that assets existed your spouse did not disclose and were not divided in the divorce, it is imperative you contact a family law attorney to assist you in pursuing claim to those assets even if the divorce has already been finalized.

Time is of the Essence

While there are several helpful tools in tracking undisclosed or hidden assets, it is still important to contact an experienced family law attorney if you become aware that your spouse (or soon to be ex-spouse) is hiding assets. Cash and valuables can disappear and be difficult to recover, even if the existence can be proven). If you are considering a divorce and believe assets may disappear or be hidden, it’s best to begin the search and tracing process sooner rather than later.

The Ramos Law Group, PLLC and its legal team have handled many cases that dealt with hidden assets and have the resources available to help you if you believe your spouse has hidden community property.

If you are seeking a divorce in Texas and either you or your spouse owns a business that was started during the time of the marriage, it is likely this is going to become a contested issue in your divorce.

Determining the value of a business is much more complicated than determining the value of real property. While looking at comparable sales in the same area is an excellent place to start, no two businesses are exactly alike. Several approaches to determining a business’ value in divorce must be employed in order to arrive at a final determination.

Options for Business Valuation

Your attorney will discuss options if you’re divorcing with a business involved at the outset of your case, but it is likely that you will want to employ a business valuator to examine the business and provide a professional estimate. You and your spouse might agree to start the process by hiring a joint business valuator and then seeing what their report says before hiring your own expert.

While this may be somewhat costly, the expertise that a business valuator brings to the table cannot be underestimated. Business valuation concepts are incredibly complex, so if your case goes to trial, you will need someone who is an expert in the field to provide testimony to the Judge that explains in clear and precise terms how they determined the value of the business in your divorce.

The business valuator is going to look at the factors outlined in Revenue Ruling 59-60 to start the valuation.

Factors for Business Valuation in Revenue Ruling 59-60

  • Nature and history of the business
  • Economic and industry conditions
  • Book value and financial condition
  • Earning capacity
  • Dividend paying capacity
  • Goodwill or other intangible value
  • Prior sales of the stock and percentage of the business being valued
  • Market price for corporations in the same, or similar, line of business

Relevant Business Documents:

  • Business Tax Returns
  • Income Statements
  • Balance Sheets
  • Sales or Operating Budgets
  • Payroll Data
  • Summary of Inventory
  • Summary of Assets
  • Employment Contracts
  • Intellectual Property
  • Incorporation Documents
  • Financial Forecasts
  • Business Organizational Chart
  • Bank Statements
  • Accounts Receivable Report
  • Depreciation Schedules
  • Summary of Dividends and Distributions
  • Any other pertinent contractual documents (i.e. licensing agreements, nondisclosure agreements, etc.)

Once the business valuator has gathered and reviewed all of the necessary financial documents, they will schedule interviews with the owner spouse and other key executives. After compiling all of the necessary data, and conducting the necessary interviews and onsite inspections, the business valuator will compile a report that will be reviewed by the attorneys for use in court. It will take some time to receive the written report, but the findings contained within will be crucial to arriving at a fair and equitable distribution of the community estate.

Hire a Specialist Attorney

Divorcing with a business involved can be a lot more complicated, and determining the value of a business in a divorce is one of the most complex issues involved in your divorce. Make sure to discuss these matters with your attorney in your initial consultation to make the most use of your time.

For more information on Divorce for Business Owners or C-Suite Executives see these guides:

Divorce For Business Owners
Divorce For CEO & C-Suite Executives

If you’re ready to hire expert representation, give us a call or email today!

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