The discovery that the South has the highest divorce rate in the USA, might be a wake-up call to many people about learning more about their marital and divorce rights in Texas.
Given that after marriage, many people bring their spouse into a small business that was established before marriage, an unexpected divorce can wreak havoc on each party's financial position. This is especially true in a state like Texas, which is considered a community property state, where each party often walks away with half of the marital property in a divorce.
Additionally, while a family business that was handed down from a previous generation is considered to belong to one spouse, it can become marital property through the duration of a marriage unless certain legal steps are taken to prevent this. The same co-mingling can also occur with a cash gift that one might receive from a family member. It makes sense to keep ownership of such assets separate.
With this in mind the Houston Chronicle offers a few points of advice about how to go about protecting a small business in a divorce. Here is a summary and commentary on those points:
1. Create a prenuptial agreement before marriage. This should disclose your financial situation at the time as well as that of your spouse, and whether in the event of a divorce the small business will stay yours in full, or whether the spouse will get a part. It is best if each party is represented by their own attorney during the prenup process.
2. Limit the spouse's involvement in the business. While it may be cost-effective in the short term to have the spouse work for you for free, this could come back to haunt you in the event of a divorce.
3. Pay yourself a reasonable salary from the business instead of investing everything back into the business. This way it is clear what you are worth and what the business is worth.
4. Create a "buy-sell" agreement that states that no one can sell or trade shares in the small business without offering the partner a chance to buy first.
5. Create a postnuptial agreement that gets written up before the divorce. It is a final declaration of what you and your spouse can keep.
Another tip the Houston Chronicle gives is to simply offer to buy the spouse's share of the business.
Because of the divorce rate in the USA it is increasingly the case that marriages are not forever, whereas a small businesses can be with you 'till death do us part. As such, it is important to protect a small business during a divorce. Yes, that means even protecting it from your spouse during your marriage. If you are already married and have involved your spouse in your business, it might be a good time to talk to an attorney about how to take some steps to protect your small business, just in case.