Divorce and Business Ownership
Divorce is a challenging and emotional life event. For entrepreneurs, the prospect of dividing business assets in the event of a divorce is daunting. As a small business owner, you've poured time, energy, and resources into your business.
You are probably wondering, "What happens to my business in the divorce?" By understanding marital assets and how they get divided in a divorce case, you can plan for the future of your small business.
Defining Marital Property and Separate Property
Whether your business is subject to property division depends on what kind of property it is. Generally, a divorce has three types of property:
- Marital property: Property acquired by the couple during the marriage
- Separate property: Property owned before the marriage or certain gifts or inheritances
- Combination: Separate property that became marital property due to comingling of funds
Two key factors influence the classification of marital property during a divorce:
- State laws: State laws define marital property and how to divide property in a divorce. To learn how your state handles marital property, visit FindLaw's section on state marital property laws and select your state.
- Treatment of property during the marriage: How you and your spouse manage property during your marriage can impact its classification in divorce. This includes how you get, manage, and use assets together. These factors play a role in property division during divorce proceedings.
Community Property vs. Equitable Distribution
It's essential first to determine whether a divorcing couple lives in a community property state or an equitable distribution state. In community property states, the division of marital property is equal. The idea is that each spouse has an equal interest in the shared property.
Of course, the law is never simple, so there are exceptions. Generally, any gifts or inheritances given to one spouse during a marriage are separate property. Yet, commingling that property with community property can change its characterization.
In equitable distribution states, the division of property is less straightforward. The concept of equitable distribution emphasizes fairness rather than equal division. Courts consider many factors to "fairly" divide property in the divorce process.
Divorce and Business Ownership: When Is a Business Marital Property?
If one or both spouses started a business after the couple got married, the business is likely marital property. This means that each spouse has a right to a share of the business. This is especially true if you start or maintain the business together.
Businesses started by one spouse before the marriage may be marital property. Your business may be marital property if your ex-spouse contributed to the business during the marriage. "Contributed" means not only time or money spent on the business. It also includes indirect contributions like maintaining the household while one spouse runs the business.
A professional practice presents unique considerations for classifying it as marital property. Some examples of professional practice are legal, medical, or accounting businesses. Laws and regulations regarding professional practices as marital property vary by state. Consulting an experienced family law attorney can help you navigate the process of handling professional practices in divorce settlements.
Determining the Value of the Business
Determining the value of a business is an important step in divorce proceedings. There are several valuation methods to calculate the value, which include:
- Market valuation: This is the fair market value of the business. It is based on how much the business would be worth if it was sold at the time of calculation.
- Income-based valuation: This is a two-step process. First, estimate your expected net income over a certain period of time. Then recalculate to determine cash flow in today's dollar value.
- Asset-based valuation: This is totaling your business's assets and subtracting the liabilities to find the "book value."
It is vital to compile a comprehensive list of all the business assets and their values. Business assets encompass a wide range of items including:
- Physical assets (like real estate, equipment, inventory)
- Financial assets (like cash, bank accounts, and accounts receivable)
- Intangible assets (like intellectual property, trademarks, customer lists, and phone numbers)
Obtaining a business valuation can seem like a daunting task. Hiring a qualified business appraiser or financial expert can help you get an accurate valuation. The value of a business can impact the calculation of other divorce matters like child support and alimony (or spousal support).
Protecting Business Interests
One way to ensure that a business stays out of property division in a divorce is to have a prenuptial agreement (or “prenup") before the marriage. It is possible to get a postnuptial agreement to clearly define business ownership. This is like a prenuptial agreement, except that it occurs after the couple is already married. These agreements would prevent the business from becoming marital property.
Shareholder or operating agreements can protect business assets. A shareholder or operating agreement outlines ownership and transfer restrictions. Transfer restrictions can prevent the transfer of a portion of the business. Requiring shareholder approval for a transfer is a common way to restrict transfers.
A buy-sell agreement can safeguard a business in a divorce when there are multiple owners. This agreement outlines what happens to the business shares if a divorce occurs. It may include provisions that require the sale or buyout of the divorcing spouse's ownership interest.
Have Questions About Divorce and Business Ownership? Talk to an Attorney
Divorce cases are complex due to many issues and emotional factors. To address questions about the impact of divorce on business ownership and seek legal advice, consult a local divorce attorney. A divorce lawyer will guide you through this stressful period and assist in protecting your business's future.
Can I Solve This on My Own or Do I Need an Attorney?
- You may not need an attorney for a simple divorce with uncontested issues
- Legal advice is critical to protect your interests in a contested divorce
- Divorce lawyers can help secure fair custody/visitation, support, and property division
An attorney is a skilled advocate during negotiations and court proceedings. Many attorneys offer free consultations.
Don't Forget About Estate Planning
Divorce is an ideal time to review your beneficiary designations on life insurance, bank accounts, and retirement accounts. You need to change your estate planning forms to reflect any new choices about your personal representative and beneficiaries. You can change your power of attorney if you named your ex-spouse as your agent. Also, change your health care directive to remove them from making your health care decisions.