Five Rules for Your Sole Proprietorship and your Divorce
Getting a divorce in The Woodlands is complicated enough, but if you own a business operated as a sole proprietorship then things get even more complicated. The application of these rules depend entirely on the facts of your case so review everything carefully with your Woodlands Collaborative Divorce Attorney, but you might be surprised at how the community property laws apply to a sole proprietorship.
1. The ownership interest in a sole proprietorship created before marriage is separate property.
This is simple enough and rather straightforward. If you began the business before marriage then your ownership interest qualifies for the protections available to separate property in a Woodlands Divorce.
2. The tangible assets acquired by a separate property sole proprietorship during marriage are (presumptively) community property.
Many business owners mistakenly believe that if the ownership interest in the business is separate property then everything owned by the business is also separate property. This is not the case. The community property presumption applies to property acquired by the sole proprietorship during the marriage even if your business was started before the marriage. The tracing rules also apply to rebut the presumption so if you can trace the assets acquired to a separate property source then you may be able to claim separate property protection.
3. Certain intangible assets of a separate property sole proprietorship–such as personal goodwill–are not divisible.
The courts have ruled that professional goodwill is not community property. In addition, personal goodwill of a sole proprietorship is not divisible as community property even if the sole proprietorship itself is community property. However, commercial goodwill is community property and subject to division if the sole proprietorship is also community property.
4. An equitable reimbursement claim may be made for payment of improvements to separate property used by a sole proprietorship.
If community property is used to improve the separate property that a sole proprietorship uses then the courts do recognize a claim for equitable reimbursement to the community estate.
5. An equitable reimbursement claim for inadequate compensation may be made for enhancement to a separate property sole proprietorship.
Claims for inadequate compensation, including a spouse’s time, talent and labor in working for and improving the sole proprietorship can be made during the divorce case even if the business is separate property.
This is just the tip of the iceberg in dealing with the property issues that accompany a sole proprietorship or other business in a Woodlands Divorce. Because of the complications that can arise when dealing with an ongoing business during a divorce many business owners choose to take advantage of the benefits of a Woodlands Collaborative Divorce when possible. If you would like to learn more, call us at (832) 592-7913 or fill out the form to the right of the screen.