Divorce can have a major impact on businesses owned by one or both spouses. When a divorce divides marital assets like a business, it is critical to take steps to protect your interests.
In this article, we will discuss how divorce affects business assets and ownership. We’ll look at factors like determining if a business is considered marital property, the process of dividing a business during divorce, and strategies for protecting your business interests during a proceeding. With the help of a knowledgeable divorce attorney or family law attorney, you can navigate dividing your assets while minimizing the impacts on your livelihood.
Understanding Divorce
To understand how divorce impacts a business, it is first important to understand some basics about the divorce process.
Divorce is the legal dissolution of a marriage by court order or other legal action. The divorce process includes determining how to divide marital property and assets equitably between the divorcing spouses. These determinations are made based on family law statutes and precedents that can vary by state.
Navigating a divorce typically requires working with a divorce lawyer or family law attorney. A lawyer can advise you on your rights and options while representing your interests in negotiations and court procedures. Their expertise can be invaluable when a business is involved.
What Constitutes Marital Property
A major component of divorce proceedings is identifying marital assets that will be divided between the spouses. This is known as determining the “marital estate”.
Marital property generally refers to any assets acquired or income earned during the marriage. This can include real estate, investments, retirement accounts, cash savings, stock options, jewelry, vehicles, and business assets.
The key factor is that the property was accumulated during the time of the legal marriage. In most cases, it does not matter which spouse holds the title or is named as owner. The assumption is that both contributed to acquiring marital property during the marriage.
This means that all or part of a business started during the marriage could be considered marital property in a divorce case. The business assets, or an interest in the business, may need to be divided even if one spouse was the sole owner.
A divorce lawyer or family law attorney at the law office can help investigate and determine marital versus separate property. There are some exceptions, such as assets acquired through inheritance which may be considered separate property.
Divorce Impact on Business Assets
There are a number of ways a divorce can impact business assets and ownership interests:
- The business may be considered partially or fully marital property that is divided equitably in the divorce. This could result in spouses splitting or sharing ownership.
- The value of the business must be determined. An independent business appraiser is often used to establish the current market value of a business. Errors in valuation can significantly impact each spouse’s
- Courts can order the business to be sold and proceeds divided if the spouses cannot reach an agreement on allocation. This can disrupt operations and may result in loss of the business
- Divorce settlements can burden a business with debt obligations like financed payouts to the non-owning spouse. This diverts operating capital from the company.
- Disputes during divorce can lead to costly litigation expenses that also divert resources away from the business.
- Attention focused on the divorce may cause an owner spouse to neglect the business, resulting in declines in profitability and loss of competitive edge.
- Transfer of partial interest in the business to the non-owning spouse can create management challenges if that spouse takes on a role in the company.
These examples demonstrate the variety of ways divorce could negatively impact a business. Advance planning and strategic legal guidance is key to minimizing disruption and financial loss.
The Process of Dividing a Business in a Divorce
If a business is determined to be marital property, the complex process of valuing and dividing the business begins.
First, the business will need to be professionally valued. A business valuation specialist or business appraiser will be brought in to determine the current fair market value of the business. This includes assessing all assets and liabilities. For some businesses, like retail stores, there may be a relatively straightforward valuation process. For others, like startups with little revenue or complex partnerships, the valuation can be quite complicated.
Next, negotiations happen between the spouses to determine how ownership and control of the business will be divided. This depends on each spouse’s contribution to the business, their current and future role, and other factors. There are several possible outcomes:
- One spouse retains full ownership and control. They “buy out” the other spouse’s share of the business by providing money or other marital assets.
- The business ownership percentage is split between spouses based on their contributions. Some couples continue jointly running a business this way.
- One spouse takes over the business and provides ongoing financing payments to the other over an agreed time period.
- The business is sold and the sale proceeds are split equitably.
- In rare cases, a judge orders the business be sold if the spouses cannot agree how to split control.
There are many factors around valuations, financing, and tax implications that a divorce lawyer will help you fully consider when negotiating or litigating the division of your business in a divorce.
Equitable Distribution and the Business
During a divorce, marital assets are divided under the principle of equitable distribution, meaning fair and just division based on the situation. It does not necessarily mean a 50/50 split.
Some factors considered for the equitable distribution of a business include:
- The nature and size of the business
- How much each spouse contributed to starting or growing the business
- Whether the business was open before marriage or acquired later
- Both spouses’ role in operating the business
- Which spouse has more need for ownership interest or income from the business
- Documented efforts to build the business‘s value
- Goodwill and reputation value of the business
The goal is a balanced and just allocation to both spouses in the divorce. There is not usually a standard formula. A family law expert can advocate for the fairest solution for your situation when dividing up a business.
Protecting Your Business in a Divorce
For business owners going through a divorce, protecting the company is a key priority. Here are some strategies that can help shield your business assets when applied appropriately:
- If possible, clearly document any pre-marital contribution to starting the business or acquiring assets. Separate property is not usually considered for division.
- Separating business finances from personal finances makes valuation simpler. Don’t co-mingle funds.
- For partners or co-owners, a well-drafted partnership agreement and operating agreement can limit rights or claims.
- Explore a prenuptial agreement if marrying after starting a business to define separate property.
- Gifting part of the business to irrevocable trusts for children can protect that portion from divorce claims.
- In some cases, restructuring or altering ownership ahead of divorce filings may limit rights of a spouse. However, courts can still override if they find manipulation occurred.
- Electing S-Corp status and paying a reasonable salary to owner-employees can potentially limit community assets.
- Maintain detailed records showing active management and engagement in the business to help prove contributions.
Any strategies should be considered carefully with thorough guidance from legal and financial advisors. Protect your business in a prudent and proactive manner.
Frequently Asked Questions
Q. Is it better to sell a business before or after divorce?
- There are pros and cons to selling a business before or after divorce. Selling before allows spouses to split proceeds as a marital asset. Selling after may allow an owner to keep the business but they must buy out the spouse’s share. An attorney can advise the best timing.
Q. Should I start a business before or after divorce?
- It’s generally recommended to start a business after divorce to avoid any dispute over ownership or claims that it is marital property. However, there may be reasons to start a business before finalization, like needing income. Discuss with an attorney.
Q. How is a small business valued in a divorce?
- Several factors determine a small business’s value in divorce: assets, debts, revenue, profitability, market value, and goodwill. A professional business appraiser evaluates the overall fair market value. The increase in value during marriage is marital property.
Q: How does a divorce affect a business?
A: Divorce can affect a business in various ways, including potential disruption to daily operations, changes in ownership structure, and potential disputes among business partners.
Q: What role does family law play in dividing business assets?
A: Family law governs the division of assets during a divorce, including the guidelines for dividing business assets.
Q: What is separate property in the context of a divorce?
A: Separate property refers to assets that are not subject to division in a divorce, such as assets acquired before the marriage or through a separate inheritance.
Q: Should I consult a family law attorney or a divorce attorney for business asset division?
A: It is advisable to consult both a family law attorney and a divorce attorney who specialize in business asset divisions to ensure you receive comprehensive legal guidance.
Key Takeaways
- Divorce can impact business valuation, ownership, operations, and viability.
- Most businesses started during a marriage are considered marital property.
- Understanding legal processes around business division is critical.
- Proactively consult attorneys and valuation professionals to protect yourself.
- Explore ways to maintain ownership through buying out your spouse’s share.
- Institute necessary transitions in management, operations, etc. to continue running your business.
- Avoid court intervention if possible by negotiating directly with your spouse on dividing the business.
Going through a divorce is always challenging on a personal level. When business interests are also involved, it adds a layer of complexity. While the stakes feel high, with proper guidance from legal and financial professionals, many couples successfully navigate dividing joint assets like a shared business. With preparation, strategic thinking and a solutions-focused approach, your business can emerge intact on the other side of divorce.
