Couples who own a business together face unique challenges when going through a divorce. There is no doubt a concern on whether or not the business can survive a divorce. Will it be divided equally? Sold and the assets split? Exactly when is a business considered marital property? These are all issues to be resolved during a settlement negotiation.
The first step is to get a professional valuation done of the business. It must be determined what type of asset the business is — marital property that is jointly owned, separate property that belongs to one spouse and is not subject to division, or a combination of both? The dollar value of the business must also be determined, taking into consideration the company’s assets, income, debts, liabilities, and potential future earnings.
Although one spouse may be tempted to take actions that would make the business appear to be less valuable than it really is, the best step you can take is to retain a family law attorney with experience in dealing with business assets.
After a valuation is completed, the divorcing couple must decide how the business will be divided if it is found to be full or even partial marital property. There are three main methods most courts use to divide a business in divorce:
One spouse buys the other spouse out.
This method is typically used when one spouse is more involved or essential to the business. He or she can buy out the other spouse, either by agreeing to award that spouse another marital asset that is of comparable value to half of the business or by agreeing to make cash payments over time.
There are several considerations that must be taken into account when determining how much of a business is marital property — if the business was started by one spouse prior to the marriage, if the business was inherited by one spouse, or if the divorcing couple owns the business with another partner. Any of these unique circumstances will be taken into account when valuating the business and determining fair financial compensation.
Business is sold and proceeds are split.
If there is disagreement about who should be awarded the business, it may be sold and the proceeds split between spouses. This may happen in cases when the business income is not sufficient to provide fair compensation to the spouse who will not get the business.
Business continues to operate under joint ownership.
This scenario is typically rare, since two people who divorce generally don’t want anything to do with each other after the divorce is final. However, in some cases, co-ownership can work out, depending on the ownership structure of the business. If the business is a partnership, it is owned by the partnership entity, not by the individual partners, who can only dispose of their interest in the partnership. Any distribution of profits or income from the partnership during a marriage is considered marital property even if the spouse’s interest in the partnership is separate property.
If the business is a corporation, its assets are neither marital nor separate property; only a spouse’s interest in the corporation may be awarded by a court.
If the business is a sole proprietorship that was established during the marriage, all of its assets are considered to be marital property that is subject to equal distribution in a divorce.
You can rely on Cistaro Law to skillfully negotiate and mediate your issues to a satisfactory resolution. Should the need arise, you can also count on our experience for being aggressive litigators if the situation calls for a more assertive response. Contact us today for your free consultation.