Concerns When Dividing a Spouse-Owned Business

 Posted on August 18, 2016 in Complex Property Litigation

A closely-held business is often the most valuable asset in a high net worth divorce, from both a financial and emotional standpoint. Financially, a business is often a couple’s primary income source, and many spouses may be hard-pressed to find alternate employment if the business is removed from their lives. Emotionally, all business-owners know the level of investment required to make a business succeed, particularly from a time standpoint. As a result, for many owners, divorce from their businesses may be as emotionally jarring as divorce from their spouses.

In many cases, the ex-spouses can set aside their personal differences, at least to an extent, and the business can continue operating. In other cases, one spouse is able to buy out the other spouse, through a cash payment, an offset elsewhere in the property settlement, or a combination of both. If neither of these things are in the cards and it is in the best interests of everyone that the business be sold, there are a number of issues that often crop up during the valuation process.

Commingling

The first step in dividing a business is determining that entity’s economic value, and this process often includes commingled property. For example, the wife may borrow money against her 401(k) so the business has additional capital during a down month.

Actually, there may be further inquiry into this matter, in terms of the characterization of the transfer. Was the money intended as a gift, an interest-free loan, an interest-bearing loan, an investment, or something else? The answer to this question may alter the nature of the reimbursement that the wife’s estate receives.

Alter Ego

Just like a corporate veil can be pierced for negligence purposes, and individuals can be held liable for damages in civil court, a business may be no more than a vehicle for one spouse. This is particularly true if, for example, the husband uses business funds to make his car payments. Needless to say, there may be significant tracing and reimbursement issues involved.

Goodwill

Business goodwill is a business asset, just like cash and inventory, but it is not necessarily a community asset.

• Enterprise goodwill is tied to the business itself, such as a McDonald’s franchise name.
• Individual goodwill, like “Joe’s Jewelry Store,” is tied to Joe.

In most cases, enterprise goodwill is a community asset, whereas individual goodwill is separate property.

Business and personal property must be divided in a just and right manner in every high asset divorce. For prompt assistance in this area, contact an aggressive divorce lawyer in Williamson County. Call Powers and Kerr, PLLC at 512-610-6199 to schedule a consultation.

Sources:

http://www.statutes.legis.state.tx.us/Docs/FA/htm/FA.3.htm

http://www.statutes.legis.state.tx.us/Docs/FA/htm/FA.7.htm