There is a great deal of misinformation circulating about how property is divided in a Texas divorce, and the division of businesses is a common source of confusion. Here are some of the biggest myths about business asset division and the truth behind them:
1. A Business Is Separate Property
Some business owners believe that the business is separate property and not subject to division because they own it in their name. That is not the case. Property division is not dependent on the name on the asset. Additionally, people who started a business prior to getting married often assume that it is their separate property. However, the business likely grew or gained in value during the marriage, making at least a portion of it community property and subject to division.
2. The Business Has To Be Divided
There is no requirement that the business has to be divided. In most cases, that is the preferred option. However, there are times when ex-spouses who co-own a business together are able to continue operating the business even after they get a divorce.
3. There Is A "Best Way" To Divide Businesses
Some believe that the best way to divide a business is for one spouse to buy the other out. The truth is that there is no single best way to do anything in a divorce. Everything depends on the situation and the individual's goals. Yes, in many cases, this may end up being the best way. In others, a different method may prove to be the best.
4. The Type Of Business Entity Does Not Make A Difference
Type of business entity can make a significant difference. Non-incorporated entities will be divided differently than corporations. It simply would not make sense to approach the division of a small sole proprietorship in the same way as a large corporation.
5. Financial Statements Are All That Is Needed To Value A Business
There is a lot that goes into valuing a business. Revenue needs to be looked at, as well as physical assets like inventory and equipment. However, not all of a business's value is so tangible. For many businesses, goodwill makes up a substantial portion of the value, and that cannot be easily measured just by looking at financial statements.
6. A Failing Business Should Not Be Worried About In Divorce
On the surface, it appears as though a business is in the red. Perhaps a closer look is in order. Is it possible that the business is actually profitable even though it does not appear to be? In reality, small business owners can have discretion over the categorization of cash flow. What looks like a failing business may have some value, which is why it is important to look closely any time a business is involved in divorce.
7. Dividing A Business Is Like Dividing Any Other Asset
Businesses are extremely unique in terms of valuation and division. You want to work with an attorney who is skilled in this specific type of property division and who has a history of positive outcomes in these matters. Take the time to ask your attorney questions and find out about his or her background in dividing businesses in divorce.