Last Updated on September 28, 2023 by Benson Varghese
Many couples who marry never consider the impact a divorce may have on either spouse’s professional practice; after all, no one expects they will divorce at some point in the future. Most professionals consult with accountants and lawyers while setting up their practice, but give little thought to the dissolution of their business – particularly if that dissolution stems from divorce. Protecting your professional practice in a divorce is important, and can prove legally challenging and complicated. If you’re considering divorce and have a professional practice, give us a call to discuss how to best protect your professional practice in divorce.
What Not To Do When Facing Divorce
Spouses who have professional practices should never attempt to manipulate marital assets in an effort to keep them from the other spouse. Removing marital estate assets or liquidizing business assets could lead to charges such as “dissipation of marital assets,” and Texas courts regard those who try to do this when divorcing unfavorably. Ultimately, unscrupulous attempts to hide marital assets could negatively affect what happens with the professional practice in a divorce. The professional practice should be operated during the divorce process in the same manner it was prior to divorcing.
Prenuptial and Post-Marital Agreements in Divorce
In Texas, both spouses are given equal protection by the court when it comes to divorce and property. That said, prenuptial or post-marital agreements may have little impact when it comes to professional practices. The state makes it clear that property is “community,” and a contract between spouses can protect the business’s original value, but increased value of the business during the marriage is considered marital assets. An experienced Texas divorce attorney at Varghese Summersett Family Law Group can provide guidance on how a prenuptial or post-marital agreement may impact your divorce.
The Discovery Process
During a divorce, attorneys complete what is known as “discovery” to learn about the marriage assets and marital estate. Texas is a community property state, which means the assets and liabilities a couple has are divided in a manner considered “fair and just.” Essentially, property and debts are divided equally in most cases.
When a spouse started or belonged to any kind of professional practice before marriage, a portion of the practice can still be included in the marital estate. Any increases in value during the marriage would also be included in the marital estate. In order to determine the amount of the business belonging in the marital estate, divorce lawyers learn the value of the practice at the marriage date, and separation date. Other than patient information and records, your divorce attorney can check all financial records in the discovery process.
Valuation of a Professional Practice in a Divorce
Divorce cases involving professional practices can be complex. In order to value the practice and determine how property will be divided, the following must be considered:
- Determining community property. As explained above, Texas is a community property state. However, property acquired by an inheritance, gift, or prior to the marriage is considered separate property. If a professional practice is established during the marriage, it is considered community property. If established prior to marriage, it is considered separate property. When the business earns income during the marriage, that income is considered community property.
- Standard of value. There are several standards of value accepted which include fair market value, appraised value, book value, liquidation value, and original cost value, among others.
- Goodwill. The term “goodwill” essentially means intangible value in divorce cases, and generally is the difference between a professional practice’s fair market value and the practice’s net tangible value.
What type of financial information will be asked for in a business valuation? Federal income tax returns that were sent to the Internal Revenue Service, accounts payable and receivable reports, financial statements, a fixed-asset registry, and balance sheets are some of the reports/documents that will be analyzed in determining the value of a practice. Those in the healthcare or medical services field such as doctors and dentists will need to provide capital equipment lists, demographic reports, and new/existing patient count reports.
Professional Practice Resolution and Division
A non-professional spouse cannot own or co-own a professional practice unless that spouse is licensed. In some cases, spouses can compromise or negotiate a solution, however the most common way to resolve business property division between spouses is through a buy-out. In this scenario, the professional practice owner buys out the community property share of the business’s value from the non-professional spouse. This is why valuation of the practice is so critical in divorce for those owning their own practice. There may be circumstances in which a greater share of the business assets is given to the non-professional spouse, such as contributions made by that spouse to support obtaining a degree or professional license by the other.
Consider Contacting Varghese Summersett Family Law Group
Divorce can be stressful and complicated on its own; when a professional practice is involved, it becomes even more legally complex. Doctors, dentists, accountants, chiropractors, and other professionals who have their own practices often have no idea about how their businesses may be impacted by divorce. Will the value of the practice be divided, and can spouses co-own a practice? The business itself is not divided; it is the value that is of concern when a couple decides to end their marriage. A spouse who is not licensed cannot operate the professional practice.
At Varghese Summersett Family Law Group our top priority is providing sound legal guidance to our clients and helping them navigate the often complicated Texas laws. If you have your own practice, you want skilled legal advice and an attorney on your side who is skilled and knowledgeable when it comes to divorce and family law. We invite you to schedule a consultation today with our experienced divorce attorneys regarding your professional practice in a divorce by calling (817) 900-3220.