Before taking concrete steps towards starting a new business while divorce proceedings are underway, it is critical to understand the impact that divorce has on entity formation and ownership. Specifically, there are three factors that may help an individual considering a new business venture during a divorce: characterization, process, and the existence of prior agreements.
- Characterization: During a divorce proceeding, the marital estate’s property undergoes a process called “characterization.” In that process, the court examines all property owned by both spouses and determine whether that property is owned by an individual spouse or the married couple jointly. A spouse’s “separate property” is generally property that was obtained as a gift, inherited, or obtained before the marriage. However, Texas is a “community property” state. This means that the court will presume that all property obtained by either spouse during the marriage is “community property,” and is owned jointly by both spouses. While each spouse can keep their separate property, community property is divided between the spouses. If you form a business while married (even if a divorce lawsuit is underway), your ownership interest in that business will be presumed to be community property.
- Process: Another factor worth considering is the process through which a divorce is granted. Divorce proceedings are initiated through the filing of a petition with the court. The petition officially puts the court—and the other spouse—on notice that a divorce is being sought. After the case has been settled or tried, the judge will officially grant the divorce by issuing a signed document called the “Final Decree.” The Final Decree legally executes the divorce. Consequently, most property obtained by the marital estate before the Final Decree is issued will be classified as “community property,” including any business interests created after the filing of the petition.
- Prior Agreements: There may be other factors which could substantially impact your decision to form a business while a divorce lawsuit is pending. A common example of such a circumstance is the existence of a prenuptial agreement (“prenup”) or a post-nuptial agreement (“postnup”), which delineates the property rights of the spouses. In Texas, because couples are generally free to include whatever terms they desire in prenups and postnups, many such agreements place limits on the community property presumption. Similarly, before the Final Decree is issued, the spouses may have reached a Mediated Settlement Agreement (an “MSA”), which might contain provisions limiting a spouse’s right to claim an ownership interest in specific assets.
If you have questions regarding the creation of a new business entity during a divorce, contact Kirker | Davis LLP to schedule a meeting with an experienced lawyer today.