What if you have a great business idea or opportunity, but are going through a divorce? Is it wise to start the business, or should you wait until your divorce is final?
The answer is almost always: wait. There are several reasons for this, but the most important is something particular to Texas divorce law. Texas is the only state I’m aware of that lacks a ‘legal separation’ statute. This means that your spouse remains your financial ‘business partner’ until the day you get a divorce. That might be a year or more after one of you files for divorce, and years after you separate.
What does this mean?
You will be doing all of the hard work at the founding of your new business to benefit the spouse you’re divorcing! Very few people think that is a good idea.
Furthermore, if your new business fails, you’ll be blamed for the failure and accused of ‘wasting’ community property. Since most new businesses fail, this is a real risk.
Real Life Examples
Here are examples of two businesses that started during a divorce with $100,000 in community funds. This assumes these businesses were formed when the spouses were separated and finalized at the end of Year 2 when the divorce was finalized.
Year 1: profit $100,000
Year 2: profit $200,000
Valuation on date of divorce: $300,000
Amount Joe pays his spouse: $350,000 (half of the initial investment plus half of the valuation plus half of the profits).
Year 1 loss: $50,000
Year 2 loss: $50,000
Goes out of business in Year 2, so valuation is $0.
Amount Joe pays his spouse: $50,000 (half of the initial investment).
Either way, Joe has worked hard for two years. If he has a successful business, he’ll shard half of the fruit of that labor. If he goes out of business, he STILL pays his spouse.
There are a few reasons that Joe might want to start the business anyway:
- He thinks the new business is such a great idea that he doesn’t care if his spouse benefits at the beginning; or,
- He has his lawyer put together a post-nuptial that gives him the full upside of the new business (his spouse would have to agree).
You can learn more about Texas divorce property law with our Ultimate Guide to Texas Marital Property Law.