What Happens to a Business Partnership in a Texas Divorce?

Business partners choose each other. A divorce complicates that choice, because the spouse of one partner has a community property claim to the value of the partner’s stake but never agreed to be in business with the others. Texas law reconciles the two by treating the spouse as the holder of economic rights, not as a new partner. This page explains how that works for partnerships, LLCs and corporations, what the partnership agreement changes and how these cases usually end.

Barton & Associates represents partners and the spouses of partners in Bexar County. As a San Antonio divorce lawyer practice, we read the ownership documents before we advise on strategy, and our page for a divorce lawyer for business owners explains the wider picture. The first consultation is free.

Why a Court Can’t Just Award Your Spouse a Piece of the Partnership

A divorce court divides the community estate in a way that is just and right (Family Code Section 7.001), the subject of our page for a San Antonio property division lawyer. That power reaches the property of the spouses. A partnership is a relationship among the partners, created by their agreement, and the other partners are not parties to the divorce. So the court does not make a spouse a partner. Section 152.406 of the Business Organizations Code provides that, when a partner divorces, the spouse is a transferee of the partnership interest to the extent of the spouse’s partnership interest.

What a Transferee Can and Cannot Do

The rights of a transferee are narrow, and they are set by statute.

• A transferee receives the distributions the partner would otherwise receive, to the extent of the transfer, and the net amount otherwise distributable to the partner if the partnership winds up (Section 152.404).
• A transfer does not give the transferee a right to participate in the management or conduct of the business while the partnership continues (Section 152.402). The transferee has no vote on partnership decisions.
• The transferee is not liable as a partner solely because of the transfer (Section 152.404).
• For a proper purpose, the transferee may require reasonable information or an account and make a reasonable inspection of the partnership’s books (Section 152.404).
• The partnership does not have to give effect to the transferee’s rights until it receives notice of the transfer (Section 152.404).
• The partner remains a partner and keeps every right and duty other than the transferred interest (Section 152.403).

In practice, a spouse who is awarded a partnership interest holds a passive position that pays out when the partnership pays out. The owner keeps running the business. That is one reason courts and spouses often deal in the value of the interest and not in the interest itself.

The Same Principle Applies to LLC Membership Interests

The LLC statute follows the same design. A membership interest is personal property and may be community property under applicable law, but a member’s right to take part in managing the company is not community property (Section 101.106). On divorce, the member’s spouse becomes an assignee of the membership interest, to the extent of the spouse’s interest (Section 101.1115). An assignee receives allocations and distributions to the extent assigned and has the records rights in Section 101.502, but an assignment does not give the assignee the right to manage the company, become a member or exercise member rights (Sections 101.108 and 101.109). An assignee becomes a member only with the approval of all the members.

The company agreement can modify many of these default rules (Section 101.052), so read it before assuming the defaults apply. The statute does not let the agreement unreasonably restrict an assignee’s right to examine records (Section 101.054).

Corporations and Closely Held Shares

For a corporation, the answer turns largely on the transfer restrictions and any shareholder agreement. Shares are transferable under Chapter 8 of the Business and Commerce Code unless the Business Organizations Code provides otherwise (Section 21.209). Restrictions in the certificate of formation, the bylaws or a written agreement among holders are valid if they reasonably serve a listed purpose, such as requiring a holder to offer shares to the corporation or the other holders before a transfer, requiring a purchase or preserving S corporation status (Section 21.211). A reasonable restriction is enforceable against a transferee if it is noted conspicuously on the certificate or in the notice for uncertificated shares (Section 21.213), and a restriction does not bind shares issued before it was adopted unless the holder voted for it or is a party to the agreement (Section 21.210).

What Your Partnership Agreement Actually Says Matters More Than People Expect

A partnership does not have to give effect to a transfer that the partnership agreement prohibits (Section 152.405), and Chapter 152 does not impair an agreement to buy or sell a partnership interest, including on death or divorce (Section 152.406). The LLC statute says the same (Section 101.1115). So a transfer restriction or a buy-sell provision can decide what the owner must offer, to whom and often at what price.

The restrictions also bear on value. Texas courts have not all given them the same weight when a divorce court puts a number on the interest, and how much a restriction reduces the value depends on the facts. Have an attorney read the agreement early, before the first mediation or the first expert report. Our guide to business valuation methods explains why two experts can reach different numbers.

What Usually Happens Instead of a Forced Partnership Interest

Most cases end in one of three ways, and the right one depends on the assets, the agreement and the partners.

A Buyout Using Other Marital Assets

The owner keeps the partnership interest and the spouse receives other community property of equal value, such as cash, real estate or retirement accounts and pensions. This keeps the partners undisturbed. It requires a reliable value for the interest and enough other property to offset it, and it requires attention to tax, because a dollar in a pre-tax retirement account is not worth a dollar of cash.

The Other Partners Buying Out the Divorcing Spouse’s Interest

If the agreement has a buy-sell provision, or if the partners choose to negotiate one, they can buy the owner’s interest or the portion the spouse would receive, and the cash is divided in the divorce. The partners must agree, and the price and payment terms (a lump sum, a note or insurance proceeds) are negotiated. A divorce mediation lawyer in San Antonio can help the spouses reach terms that the partners will also accept.

The Non-Owner Spouse Receiving a Transferee’s Interest

A court can award the spouse the economic rights described above. This is less common, because it leaves the former spouses tied to the same business and the spouse has no say in how it is run. It is more likely when the other assets cannot offset the value. If you are offered a transferee’s interest, ask what distributions the partnership is expected to make, how they are calculated, what information you will receive and what happens if the partners sell the business.

How the Interest Is Characterized and Valued

Two questions come before any division: whether the interest is community or separate property, and what it is worth. Property owned before the marriage is separate (Family Code Section 3.001), property acquired during the marriage is community (Section 3.002), and property either spouse has when the marriage ends is presumed community unless the spouse claiming otherwise proves it by clear and convincing evidence (Section 3.003). Our page on the characterization of assets and debts explains these rules.

If you owned your share before the marriage, it is still separate property, but the income from it is community property that you manage (Section 3.102). If your time and effort enhanced the interest beyond what was reasonably necessary, without adequate compensation, the community estate can claim reimbursement from your separate estate (Section 3.402). That claim is a money claim and not an ownership interest in the partnership (Section 3.404).

Value is the second question. The number depends on the method, the date and the effect of any transfer restrictions or buy-sell price. A partner and a spouse who accept the same value usually resolve the case faster and for less.

Why Your Buy-Sell Agreement Matters Here Too

A buy-sell provision typically names the events that trigger a sale, which can include death, disability, withdrawal or divorce, sets a price or a formula and says how the buyer pays. Chapter 152 and the LLC statute leave those agreements in place. The difficulty is that the formula price may differ from what a divorce court finds the interest is worth, and the court is dividing the community estate, not enforcing the partners’ contract. A formula that values the interest low can leave the owner with less than the spouse’s claim, and a formula that values it high can burden the other partners. Our guide to buy-sell agreements in a divorce explains how to review one.

What the Non-Owner Spouse Can See

The spouse who does not run the business usually knows the least about it. The routes to information are the divorce case and the transferee’s statutory rights.

• In the divorce, a court can order a party to produce books, papers, documents and tangible things and can require a sworn inventory and appraisal of the property (Family Code Section 6.502).
• As a transferee of a partnership interest, a spouse may require reasonable information or an account and inspect the books for a proper purpose (Section 152.404), and a partnership must furnish complete and accurate information to an assignee on request, to the extent just and reasonable (Section 152.213).
• As an assignee of an LLC interest, a spouse has the records rights in Section 101.502, which require a written demand that states a proper purpose.

Our guides on a spouse’s right to business records and on hidden assets in divorce, listed below, explain what to ask for and how to read it.

Protecting Your Partnership Interest Going Forward

If you own a share of a business with partners and you are married, there are steps to take before any divorce is on the horizon.

• Review the partnership or company agreement for transfer restrictions, a buy-sell provision, notice requirements and how a spouse’s interest is treated. Amending a partnership agreement takes the consent of all partners (Section 152.208), so start the conversation early.
• Consider a written agreement with your spouse. Our guide to postnuptial agreements for business owners explains how spouses can classify a business interest in advance, and it works well alongside the transfer restrictions in the partnership agreement.
• Keep business and personal money separate and keep records of what you put into the company and what you took out.
• Pay yourself a market salary, which reduces the room for a later reimbursement claim.

Do not use any of these steps to move or hide property once a divorce is likely. A transfer made to defeat a spouse’s claim can be treated as a fraud on the community estate, and the court can award the wronged spouse a larger share of the rest (Section 7.009). The protections that are available after a case is filed are described in our guide to protecting your business.

If You Are the Spouse Who Does Not Own the Business

Your position is different, and you should be careful not to accept a number you cannot check. Gather what you can: tax returns, the K-1s the owner received, any appraisal, the partnership or company agreement and records of distributions. Ask whether the owner’s draws, salary and distributions fit together. Do not agree to take a transferee’s interest, or to a buyout price, until someone has valued the interest and read the agreement. The cost of an expert is often small compared with the value of the interest.

More About Divorce for Business Owners in San Antonio

These guides cover related questions in more depth. Each one is written for Texas and Bexar County.

• Hidden assets in divorce: how undisclosed property is found and what a court can do about it.
• Taxes when a business is divided: why the structure of a deal can matter as much as the price.
• What a business owner divorce costs: the factors that drive the price of the case.
• Are assets split 50-50?: how a court divides the community estate.
• Stock options and executive compensation: dividing equity pay earned during the marriage.
• The temporary restraining order: what it bars while the case is pending.
• Keeping a divorce private: what can be sealed and what stays public.
• The Texas Family Code: how the code is organized and where these rules sit.

How We Approach a Business Partnership Case

Barton & Associates has tried Texas cases since 2001, and the family law team includes Duane Graeff, our managing attorney with more than 26 years in Texas state and federal courts, and trial attorney Désirée Flye. We represent the partner who owns the interest or the spouse who does not, and we say plainly which side we are on from the first meeting.

We start with the documents: the partnership or company agreement, the buy-sell provision, the tax returns and any prior valuation. Those tell us what a court can award, what the partners can block and what the interest is likely to be worth, and they let us advise you on a realistic outcome before you spend money on experts.

Get a Real Answer for Your Specific Situation

An accurate answer needs the agreement in front of us. Our San Antonio office is at 115 Camaron Street, San Antonio, Texas 78205. You can get directions to our office before your visit. For the first meeting, bring what you can of the following, and call even if you cannot find everything.

• The partnership agreement, operating agreement or shareholder agreement, with any amendments
• Any buy-sell agreement and any life or disability insurance that funds it
• Three years of business and personal tax returns, including K-1s, if you have them
• Records of your capital contributions, distributions and draws
• Any prior appraisal or valuation of the business
• A list of the partners or owners and their percentages
• Any prenuptial or postnuptial agreement
• Papers you have been served with, if a case has already been filed

Frequently Asked Questions About Business Partnerships in a Texas Divorce

Can my spouse become a partner just because we are divorcing?

No. When a partner divorces, the spouse is a transferee of the partnership interest to the extent of the spouse’s interest (Business Organizations Code Section 152.406), and a transfer does not give the transferee a right to participate in management (Section 152.402). In an LLC the spouse is an assignee who becomes a member only with the approval of all the members (Sections 101.1115 and 101.109).

Do my business partners get a say in my divorce?

Not directly, because they are not parties to the case. But their rights under the agreement still matter. Chapter 152 does not impair an agreement to buy or sell a partnership interest, including on divorce (Section 152.406), and a partnership does not have to give effect to a transfer that the agreement prohibits (Section 152.405). Those provisions shape what a court can realistically award.

Will my spouse get access to the partnership’s books?

Some access, through two routes. In the divorce, the court can order a party to produce books, papers and documents (Family Code Section 6.502). As a transferee, a spouse may inspect the books for a proper purpose (Section 152.404), and an LLC assignee has the records rights in Section 101.502. Both require a legitimate reason, and a request limited to the interest at issue is easier to defend.

What if our agreement does not mention divorce?

The statutory defaults still apply. The spouse is a transferee or an assignee, the partners’ management rights are unchanged, and the parties negotiate value and payment without a formula to guide them. That is often slower and more contested than a case with a clear buy-sell provision.

Can the court force my partners to buy my spouse out?

No. The partners are not parties, and a court divides the community estate between the spouses. A partnership must redeem a transferee’s interest at fair value only in narrow situations tied to the partnership’s term, undertaking or a winding-up event, and only on written demand (Section 152.611). Divorce alone does not trigger it. A buyout by the partners happens by agreement or under the terms of a buy-sell provision.

Will my spouse receive a share of the distributions?

If the spouse is awarded the economic rights, yes, to the extent of the interest awarded (Section 152.404 for partnerships, Section 101.109 for LLCs). In many cases the court or the parties instead award the spouse other property of equal value and the owner keeps the interest and its distributions.

What if I started the business before we married?

The interest is your separate property, but you must be able to prove it (Family Code Section 3.003 requires clear and convincing evidence). The income it produces during the marriage is community property, and if your uncompensated time and effort enhanced the interest, the community estate can claim reimbursement from your separate estate (Section 3.402).

How is the interest valued when the agreement restricts transfers?

The restrictions are one factor in the valuation, and experts and courts have not weighed them the same way in every case. A buy-sell price is evidence of value, but it is not automatically the value a divorce court uses. Expect each side to argue for the treatment that favors it, and have the agreement reviewed before you agree to a number.

Does the type of business entity matter?

Yes. General partnerships, LLCs and corporations are governed by different chapters of the Business Organizations Code, and the partnership and LLC statutes have specific rules for a divorcing partner’s or member’s spouse. Corporations rely more on the transfer restrictions and the shareholder agreement. Limited partnerships and professional entities have their own rules, so the governing documents should be reviewed before anyone predicts an outcome.

Can I change our agreement now to protect the business?

Yes, if the other partners agree. Amending a partnership agreement takes the consent of all partners (Section 152.208), and an LLC’s company agreement is amended according to its own terms. Add or strengthen transfer restrictions and a buy-sell provision before a divorce is likely. Changes made to defeat a spouse’s claim once a divorce is coming can be treated as a fraud on the community estate (Family Code Section 7.009).

My partner is getting divorced. Does that affect me?

It can. Your partner’s spouse generally becomes a transferee or assignee of the partner’s interest, with a right to distributions but no vote and no right to manage. Your partner stays a partner. Read the agreement for transfer restrictions, a buy-sell provision and notice requirements, because those decide whether you can or must buy the interest. Talk to a lawyer before you take any step.

Should I tell my partners about the divorce?

Check the agreement first. Some require notice of a transfer or a change in ownership, and a partnership does not have to give effect to a transferee’s rights until it has notice of the transfer (Section 152.404). The decision about what to say and when is easier to make with a lawyer who has read the documents, and it should be made before you talk to your spouse’s lawyer about the business.

Talk to a San Antonio Attorney About Your Business Partnership

The outcome of a business partnership divorce depends on documents you may not have read in years and on the choices you make before the first hearing. Speak with a divorce attorney in San Antonio at Barton & Associates about your partnership, your agreement and your goals.

Call our San Antonio office at 210-500-0000 or complete the online Free Consultation form to schedule a confidential meeting with a family law attorney in San Antonio. The office is at 115 Camaron Street, San Antonio, Texas 78205.

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Barton & Associates, Attorneys at Law
115 Camaron St, San Antonio, TX 78205
Office: 210-500-0000

Division: Family Law San Antonio
Practice Area: Divorce & Separation
Focus Area: Divorce for Business Owners