One of the more complicated property issues in any Texas divorce is how to value and account for a small business owned by one or both spouses. Unfortunately, many business owners don’t consider the impact of a divorce on that business until it is too late.
The most common and most effective means of protecting a small business in a Texas divorce is to enter into prenuptial agreements and postnuptial agreements in order to clarify the rights of the spouses in regards to the business. With a prenuptial agreement, you can make clear that the business is to remain the separate property of the spouse who owns it. More importantly, however, the business owner spouse can also seek to eliminate the right of either spouse to claim a right of reimbursement.
As I’ve discussed elsewhere on this blog, reimbursement is a claim made in Texas divorces which allows one marital estate (such as the community estate) to claim from another marital estate (for example, the separate estate of the business owning spouse) some form of reimbursement for increased value in the separate property business due to investment in the business with community funds or, more commonly, due to some other risk or detriment the community estate suffered in order to benefit the business owner’s separate estate. The commonly occurs where a business owner obtains a loan on behalf of the business which includes a personal guarantee. Most personal guarantees are written in such a way where community assets are risked in the event the business cannot meet its loan obligations. While there may be no actual loss by the community estate, it may give rise to a reimbursement claim if the value of that risk can be ascertained.
In addition, in many small businesses, all taxes owed due to the profit from the business passes through to the owners. The owners then pay personal income tax on the income they receive from the business in lieu of the business being taxed on the profits. It is possible, in some circumstances, for the community estate to claim a right of reimbursement for the taxes paid on that income which would have been attributable to the small business otherwise.
In all circumstances, a properly written premarital agreement could protect against such claims.
A postnuptial agreement can also assist with changing the rules regarding income from the separate property business. Many business owners do not realize that income from their separate property is generally defined to be community property. A properly written postnuptial agreement can change that default rule to allow all income from the separate property business to be defined as the separate property of the spouse who owns the business.
Prenuptial agreements and postnuptial agreements are but just a few ways in which small businesses may be protected in a Texas divorce. If you would like more information on how you can protect your business, contact our Houston divorce attorney, Bobby L. Warren at 713-579-9702.