How Will Divorce Affect My Business?

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Divorce and business. For the owner, running the business can be never-ending and all-consuming. In many cases, the commitment and passion for it can contribute to strains in your personal life, leading to a struggling marriage and divorce. Consult with a divorce attorney if you own a business and are facing a divorce proceeding.

Will I Lose My Business in a Divorce?  

When a person facing divorce owns a business or is a co-owner, the question arises whether the divorce will force the company's liquidation. In most cases, the simple answer is "no."

However, courts will consider your business marital property valued as part of the financial analysis in the divorce.

Marital property is all income and assets acquired by either spouse during the marriage. It includes savings, real estate, stocks, bonds, debts, and business ventures. Marital property also covers compensation generated from the business in savings. Plus, courts divide any investments and retirement savings through the date of separation equitably.

The owner's spouse's income determines future child and spousal support.

Beware: With a business value based on excess earnings, you can argue the non-owner spouse cannot double-dip. For example, if the non-owner receives the value of the extra earnings as equitable distribution, you should remove them from the income available for support. A good business divorce attorney should be alert to this potential concern.

What is Marital Property?

Since business and divorce focus on marital property and its distribution, let's take a closer look at what constitutes marital property.

If you formed your business during the marriage, it's marital property. That holds even if your spouse doesn't own any portion of your business. So, your spouse shares an ownership interest and has a claim against your company.

Even if the business is your property, your spouse may have a claim against increases in the company's value during the marriage. Generally, it's best to talk with a business divorce attorney to get a business valuation.

When determining whether or not your business is marital property or an individual asset, these factors come into play:

  • When you formed the business
  • Amount of time between business formation and your marriage
  • The success of the business before and after your marriage
  • Your spouse's involvement in business formation
  • Your spouse's contribution to business operations or growth
  • Changes in business valuation over time

Nine states view marital property as community property. As a result, they award each spouse a 50/50 split.

In other states, Pennsylvania included, courts use equitable distribution to determine what each spouse receives. You can learn about it here. So, again, you'll likely need a business valuation to support divorce proceedings.

Four Exceptions to Marital Property

As mentioned above, a variety of factors determine marital property. However, there are four exceptions:

  1. Gifts, Bequests, and Inheritances

    Any gifts, bequest, or inheritance one party receives from a third party, kept in a separate title, are not considered marital assets and are valued as of receipt. However, the increase in value is considered marital property.

  2. Property Acquired Pre-Marriage

    Marital property doesn't cover assets owned before the marriage kept in a separate title. Again, however, the increase in value during the marriage is.

  3. Property Acquired Post-Separation

    Any asset acquired after separation with non-marital funds is not marital property.

  4. Property Protected by a Prenuptial Agreement

    A well-drafted prenuptial agreement protects all assets acquired before and sometimes during a marriage. So, you'll want to consult with a family lawyer near you.

The business requires a valuation following a divorce filing when identified as a marital asset or with some marital component. The non-owner spouse has the right to know if it is marketable, if the business has significant assets, and if it successfully generates excess income for the owner.

In some circumstances, however, a business succeeds almost entirely upon the personal goodwill of the owner. As a result, it may have modest value to distribute. In most cases, the courts want the business to survive the divorce as an asset of the owner spouse, primarily where the family has been relying on the company to produce income.

Determining the Business Standard of Value in Divorce Cases

Often, a divorcing couple disagrees about the company's value, leading to a business appraiser defining the standard of value before proceeding with an appraisal. The standard of value presents a set of hypothetical conditions to determine the value.

There are three primary approaches to determining that valuation:

  1. Assets: In this approach, assets minus liabilities equals value. Assets include physical assets like inventory, equipment, and real estate. Intangible assets cover intellectual property, accounts receivables, etc.
  2. Market Value: Similar to a real estate valuation, appraisers value the business based on comparable companies sold.
  3. Income: The most common valuation method uses business history and various formulas to predict cash flows and profits for a business.

It's important to note that these standards may generate significantly different values. If you have a simple business model, it may be easier to determine a fair value. However, other cases require the services of a business appraiser.

Make sure you talk with your business divorce attorney for guidance on what comprises a particular standard of value. They can review past cases within a jurisdiction to uncover disallowed procedures or determinations. And that could benefit you greatly.

Other Considerations Involving a Divorce and Your Business

Typically, courts seek to limit damage to the business. So, they often accommodate a buyout over time of the non-owner's economic interest in the company rather than trigger financial hardship for the business owner.

If your spouse works in the business and isn't an owner, you should be wary of them actively hurting the company. For example, a spouse who calls customers or comes to the office and misbehaves may be at fault for trying to retaliate against you for personal reasons.

These actions could hurt the business asset's value and the source of future income. If you employ your spouse and they engage in this behavior, termination is an option.

Protecting Your Business from a Divorce

Although it isn't something you want to consider, 50 percent of marriages end in divorce. So, you should take steps to protect your business to survive a divorce. It's best to talk with an attorney near you to consider your options.

Here are some steps you can take:

  1. Marital Agreement

    An agreement, whether pre- or post-nuptial, allows you to designate your business or future companies as separate from the marriage. Although courts sometimes fail to uphold marital contracts, they protect your business in the event of a divorce.

  2. Buy-Sell Agreement

    This agreement controls when owners can sell their interest, who can buy their interest, and the price paid. It comes into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies. In short, a buy-sell agreement is a sort of prenuptial agreement.

  3. Shareholder Agreement

    A shareholder agreement can define guidelines in the event of a divorce. For example, it can determine the mechanisms for valuing each spouse's interest in the company, assign business ownership with a divorce, and restrict ownership transfer.

  4. Business Structure

    In conjunction with a shareholder agreement, structuring the business as a partnership or limited liability company (LLC) can protect you from a divorce and your business.

  5. Employment

    Don't allow your spouse to work for or with you. As a married couple, it may seem like a good idea. But, it can lead to issues during a divorce.

  6. Trust

    In a trust, it owns the business, so your business doesn't count as a marital asset.

Another critical protection is remembering to pay yourself a salary versus investing cash flow into the business. Doing so prevents your spouse from claiming you deprived them of monies during the marriage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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