Divorce and Business Ownership

After 19 years of marriage, Eric and Ariel reached the decision to get a divorce. Ariel has had a business of gathering and selling various collectibles since before the two were married. But now that she's getting a divorce, she's wondering what will happen to her business. Will it be divided between her and Eric or does it belong solely to her since she had it before the marriage? Well, it depends.

In the event of a divorce, a business will be looked at as an asset. Whether it will be divided depends on state laws, whether the business is characterized as marital property, and whether a prenuptial agreement is in place, among other factors. Read on to learn more about divorce and business ownership.

Defining Marital Property

The primary factor in determining whether a business is subject to property division is its classification as either marital property, separate property, or a combination of both. Marital property refers to the joint property of a married couple, which is more complicated than it seems.

First, state laws affect how marital property is defined, usually either as community property or as property subject to equitable distribution. To see how your state handles its marital property laws, please visit FindLaw's section on State Marital Property Laws and click on your respective state. Second, how the property is treated during the marriage can affect how the property is ultimately defined in the divorce.

Divorce and Business Ownership: Community Property vs. Equitable Distribution

It's important to first determine whether a divorcing couple lives in a community property state or an equitable distribution state. In community property states, almost all property acquired during a marriage is joint property of the spouses; property that each spouse had before the marriage is separate property. Of course, the law is never simple, so there are exceptions. Any gifts or inheritances given to one spouse during a marriage are considered separate property, although commingling that property with community property can change its characterization.

In equitable distribution states, property division is less straightforward because a judge decides how it's divided. Of course, there are certain guidelines set by state laws on how the property should be divided. In addition, the idea behind equitable distribution is that the property is divided "fairly" but not necessarily equally. Different factors will weigh on how the marital property is divided between the separating couple.

Divorce and Business Ownership: When Is a Business Marital Property?

If a business was started by one or both of the spouses after the couple got married, it's likely that it'll be considered marital property. Businesses started by one spouse before marriage may not be considered marital property, but this isn't always the case. For example, it can still constitute marital property if the non-owner spouse contributed to the business during the marriage. It's important to note that "contributed" can include not only direct contributions of time to the business but also more indirect actions such as maintaining the household while the business owner ran the company.

Protecting Business Ownership Through a Prenuptial Agreement

The best way to ensure that a business stays out of property division in a divorce is to have a prenuptial agreement before the marriage. However, it would be possible to get a postnuptial agreement to clearly define business ownership, which is just like a prenuptial agreement except that it occurs after the couple is already married.

Have Questions About Divorce and Business Ownership? Talk to an Attorney

Divorces are complicated, not only because of the various issues involved but also because of the emotional factors. If you have questions about how divorce affects business ownership or need help with other aspects of the divorce process, it's best to consult with a local divorce attorney in your area.