Lara Bracamonte Davila

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Dividing a closely held business in a Texas divorce

On Behalf of | May 27, 2020 | Family Law

Division of assets in a Texas divorce is always one of the most difficult issues to resolve, especially if one of the assets is a closely owned business that has been actively managed by both spouses. No magic formulae are available to resolve such a conflict, but three basic methods are available. Before beginning our discussion of those methods, the reader must understand that no two marriages are the same, and dividing a closely held business is not always susceptible to simple formulations.

Texas is a community property state, which means that property acquired during the marriage must be divided equally between the divorcing spouses. For purposes of the remaining discussion, the writer has assumed that the corporation was acquired or founded by the couple after their marriage was solemnized and that the company is inarguably a community asset.

An important preliminary questions is fixing the value of the company. This step will almost always require the assistance of a CPA or other expert in asset valuation, such as a certified business appraiser. Once the value has been fixed, the couple can devote their attention to dividing the asset.

The best way of dividing a closely held corporation, or any other asset, for that matter, is by the mutual agreement of the spouses. Perhaps the easiest method of division is to have one spouse buy out the interest of the other spouse. A purchase/sale that is incident to a divorce is generally not subject to income tax, but the terms of any such agreement should be reviewed by a tax expert.

A second method is to sell the business to a third party and divide the proceeds. This solution can be very easy if the parties can solve the financing problem. Many couples do not have enough ready cash to pay the full purchase price to the other party, and the selling party may need to finance the transaction by carrying the debt owed by the purchasing spouse. A third method is that the parties remain as co-owners.

Parties who face the obstacle of liquidating and dividing their interest in a closely held corporation should contact a lawyer with experience in both corporate finance and divorce.