1. Professional Corporations
The Texas Professional Corporation Act (TPCA) went into effect on January 1, 1970 and was supplanted by TBOC effective January 1, 2010. TBOC §402.005. Title VII (chapters 301 & 303) of TBOC covers professional corporations.
A PC may issue shares only to individuals or professional legal corporations (PLCs) that are licensed to render professional services of the kind stated in the articles of incorporation. TBOC §§ 1.002(80), 301.003, et seq. Shares may be transferred to other licensed professionals or PLCs, subject to restrictions on transfer imposed by the articles of incorporation, bylaws, or stock purchase or redemption agreements. Id. A PC can redeem the shares of any shareholder or deceased shareholder, as the board of directors may provide, or as may be provided in the articles of incorporation, bylaws, or stock purchase or redemption agreement. TBOC § 303.004. If an owner becomes legally disqualified to render professional services, his/her shares must be redeemed. TBOC § 301.008. A spouse who owns an interest in a PC does not own the assets of the PC, so those assets cannot be awarded in a divorce. Siefkas v.
Siefkas, 902 S.W.2d 72, 79 (Tex. App.–El Paso 1995,
no writ). A married professional‟s interest in a PC cannot be awarded to a non-professional spouse, as that would violate the TPCA (now TBOC) and, as far as lawyers are concerned, would collide with the spirit if not the letter of Rule 5.04(b) of the Texas Rules of Disciplinary Conduct, Tex. Rev. Civ. Stat., Govt. Code T. 2, Subt. G App. A, Art. 10, § 9, Rule 5.04 (“A lawyer shall not form a partnership with a non- lawyer if any of the activities of the partnership consist of the practice of law.”).
2. Professional Associations
Professional associations were introduced along with professional corporations by the Texas Professional Association Act (TPAA) on January 1, 1970 and was replaced by the TBOC on January 1,
2010. Chapters 301 & 302 of TBOC cover professional associations.
A PA is not legally considered to be a corporation, but it has many of the procedural and structural elements of a corporation. The TBOC lists several professions whose practitioners may form PAs, including podiatry, dentistry, optometry, therapeutic optometry, chiropractic, medicine, osteopathy, mental health, and veterinary medicine. TBOC § 301.003(2)
An interest in a PA may be owned only by practitioners licensed in the particular area of practice of the PA. TBOC §§ 301.006, .007. These interests, which may be either shares or “units of ownership,” are transferable only to other licensed practitioners in that field. TBOC §§ 301.009, .004. In divorces where one spouse is a licensed professional with an ownership interest in a PA and the other spouse is unlicensed in that field, this provision could generate confusion over the division of the asset.
Texas courts have recognized that they cannot award an unlicensed spouse an ownership interest in a community property PA upon divorce. See, e.g.,
Eikenhorst v. Eikenhorst, 746 S.W.2d 882, 887 (Tex.
App.–Houston [1st Dist.] 1988, no writ). However, the Eikenhorst court‟s solution to this prohibition was an anomaly; it awarded the unlicensed spouse an interest in the cash assets of the PA. Id. Despite the fact that this solution functionally pierces the veil of the PA, it does not fulfill the standards for piercing the entity veil established by the Texas Supreme Court in
Castleberry v. Branscum, 721 S.W.2d 270 (Tex.
1986). Furthermore, it is unclear whether TBCA‟s limited codification of limits on the piercing the corporate veil doctrine from Castelberry applies to entities created under TPAA. See TBCA art. 2.21. Concordantly, it is also unclear whether TBOC‟s adoption of a substantially similar limitation affects PA‟s created under the new Code. See TBOC 21.223.
Six months after Eikenhorst was decided, the crosstown court indicated that the unlicensed spouse may receive other property equivalent to their community interest in the P.A. Morris v. Morris, 757 S.W.2d 466 (Tex. App.–Houston [14th Dist.] 1988, writ denied), (“[W]e see no reason appellee should not have been required to buy-out appellant‟s interest in this valuable community asset.”).
3. Sole Proprietorship Businesses
A sole proprietorship is a business, operated by an individual, that is not a legal entity. The business is not a creature of the state, and does not require any certificate from the Secretary of State. Business equipment, inventory, furnishings, and other items of a sole proprietorship on hand at the time of divorce, are presumptively community property, and will be divisible unless traced. Hopf v. Hopf, 841 S.W.2d 898,
900 (Tex. App.–Houston [14th Dist.] 1992, no writ) (CPA‟s practice). If a sole proprietorship is started during marriage, then the community presumption applies to all assets of the business, and they would be separate property only if they can be traced. If the owner of a going business marries, the inventory and equipment and receivables in the business on the day of marriage are separate property. Problems arise in tracing these separate assets if they are commingled with new assets.
A spouse who incorporates a going sole proprietorship cannot argue that inception of title in the corporation arose with the unincorporated business. Allen v. Allen, 704 S.W.2d 600, 604 (Tex. App.–Fort Worth 1986, no writ). A corporation comes into existence when the Secretary of State issues a certificate of incorporation, but an ownership interest in the corporation is acquired when the corporation‟s shares are issued. The character of the stock depends upon the consideration furnished to the corporation in exchange for the stock (i.e., the character of the assets contributed during the formation of the corporation).
Id. at 604; see also Corporations, supra.
Profits from operating a sole proprietorship during marriage are community property. “The increase from a spouse‟s operation of a business always has been considered community property, even when the business itself was owned by one spouse prior to the marriage and thus was the separate property of that spouse.” Vallone v. Vallone, 644 S.W.2d 455, 462 (Tex. 1982) (Sondock, J., dissenting); accord, Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. App.–Fort Worth 1985, writ dism‟d); see
also Epperson v. Jones, 65 Tex. 425 (1886). In Epperson, the Supreme Court held that profits from
the operation of a business are “community property, and cannot, therefore, be said to increase...[spouse‟s] separate estate to the extent of a single dollar.” Id. at 428; see Moss v. Gibbs, 370 S.W.2d 452 (Tex. 1963).
Note that in a merchandise business owned at the time of marriage, it is the profit from the sale of the inventory that is community. That means that the portion of the receipts representing a return of separate property inventory is separate property. See
Yaklin v. Glusing, Sharpe & Krueger, 875 S.W.2d
380, 385 (Tex. App.–Corpus Christi 1994, no writ) (in an unincorporated used car dealership, of the $3.3 million in outstanding promissory notes, only the profit in the notes was community property);
Meshwert v. Meshwert, 543 S.W.2d 877, 879 (Tex.
Civ. App.–Beaumont 1976) (profits from heating and air conditioning business were community property),
aff’d, 549 S.W.2d 383 (Tex. 1977). There can, of
course, be a commingling problem, as over time profits are reinvested in inventory and new profits are generated. Smith v. Bailey, 66 Tex. 553, 1 S.W. 627, 627-28 (1886). In Farrow v. Farrow, 238 S.W.2d 255
(Tex. Civ. App.–Austin 1957, no writ), Husband thoroughly documented receipts and expenditures connected with buying and selling real estate and livestock, and the separate funds of both spouses which were commingled in accounts with business receipts did not lose their separate identity.
The Supreme Court has recognized the power of the court in a divorce to award reimbursement to a spouse whose separate property was commingled with profits in a sole proprietorship. Schmidt v. Huppman, 73 Tex. 112, 11 S.W. 175 (1889); accord, Hartman v. Hartman, 253 S.W.2d 480 (Tex. Civ. App.–Austin 1952, no writ).
A sole proprietorship, despite not being an entity, can have a fair market value. See e.g., Treas. Reg. § 20.2031-3, relating to Federal estate taxation (“The fair market value of any interest of a decedent in a business, whether a partnership or a proprietorship, is the net amount which a willing purchaser, whether an individual or a corporation, would pay for the interest to a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”); Treas. Reg. § 25.2512- 3 (the equivalent gift tax regulation).
Finally, the topic of unincorporated business ventures overlaps with an older form of reimbursement. When a spouse takes a separate property asset and works it with community labor to the degree that it is significantly enhanced in value, old cases say that the end product may be transmuted into community property. For example, in Craxton,
Wood & Co. v. Ryan, 3 White & W 439 (Tex. Ct.
App. 1888), Wife made a business of working her separate property clay soil into bricks, which were held to be community property. Similarly, in DeBlane
v. Hugh Lynch & Co., 23 Tex. 25 (1859), Wife grew
crops on her separate property land, using her separate property slaves. The crops were held to be community property. Again, in White v. Hugh Lynch & Co., 26 Tex. 195 (1862), where a Wife took trees from her separate property land and worked them into sawed lumber, the sawed lumber was held to be community property.