Characterizing Business Interests – Building my family law firm from the ground up has been extremely challenging. It has also been just as rewarding. Like me, all good business owners have poured their heart and soul, and countless hours, into starting something they can call their own – thus building something of both meaning and value.
But when you get divorced, that thriving business can come crashing down.
That is because of the same reasons we have been discussing over the last few blogs – equitable division of property. As much as you worked to create your own business, it can still be considered marital property subject to characterization under Texas law. Even if your spouse was not involved in the business at all.
Below is a breakdown of the characterization of business interests (separate or community property). Because there is quite a bit of overlap, I will focus on three types of businesses: corporations, partnerships and sole proprietorships.
Corporations – If you studied up on any of our previous blogs, you probably guessed by now that the characterization of a corporation is also determined by the time in which it was acquired, i.e. the date of incorporation. A business that was incorporated before marriage is separate property, while a business incorporated during marriage is community property.
With all this being said, there are exceptions. A business could be incorporated during a marriage, but if the money used to start the business was comprised entirely of separate property (gifted, money prior to marriage), the business is then considered separate property. If money used as capital to start the business was mixed funds, each spouse will receive proportionate share of corporate stock.
A quick note: Generally, corporate property is owned by the corporation, not the individual. Therefore, that property cannot be characterized as either separate or community property. The same goes for capital contributions and retained earnings.
There is also a matter of wages earned through ownership of a corporation. Please refer to one of our previous blog entries on characterization of work income for more detailed information. You can find that blog here. (http://nelsonlawgrouppc.com/characterizing-work-income/).
Partnerships and Joint Ventures – Per the Texas Family Code, the rules for partnerships and joint ventures are much the same as corporations. Once again, determining ownership interest depends on the date the partnership was created as set forth in the partnership agreement.
Profits or distributions from a capital account are also treated the same. If it was earned before marriage, or after a marriage is over, they are considered separate property. If this process occurs during marriage, the profits are considered community property.
A quick note: Property of the partnership is not subject to characterization, just like in a corporation. Also, a partner’s right to participate in the management of the partnership cannot be characterized.
Sole Proprietorships – This is the most basic form of business ownership in that one person is doing business as a particular entity and owns all assets. Thus, all property of a sole prop can be characterized as either separate or community property. This includes everything that makes up the business, i.e. furniture, fixtures, machinery, cash, and supplies.
Of course, the character of each asset depends on when and how it was acquired.
If you would like us to discuss a particular family law topic in these blogs, please contact our Nelson Law Group, PC office to let us know. We also have an extensive history of blogs like this one covering a broad range of individualized topics. We will be glad to help you in any way we can.