How Does a Divorce Impact Your Business?
If you own a business or have partial ownership of a business, you might be wondering what will happen to that business if you should divorce. The answer depends on numerous factors, beginning with whether your business can be considered marital property. If your business or your portion of a business is marital property, then that business will be eligible for division as part of equitable distribution. Keep in mind, if you share a business with others, those people may be impacted by your divorce, if you fail to properly protect it.
Businesses in Existence Prior to the Marriage
In general, a business that existed before you married is not marital property. However, just because your business existed before marriage does not mean it cannot become so. Even if you owned the business before you married, the increase in value since your marriage may be considered marital property. As a result, if you own a business that you created prior to your marriage, it is important to obtain a premarital agreement to protect it. A premarital agreement can spell out that the business is yours, and that any increase in value remains yours as separate property.
Do Not Comingle Marital Funds with Your Business
If you own a preexisting business, but you invest marital funds into that business during your marriage, then at least a portion of that business will become marital property. This is the case even if you have a prenuptial agreement. If you do not want your business to be eligible for equitable distribution, it is critical to keep marital assets away from the business so that you maintain full, separate ownership. In addition, the more involved your spouse is with the business, the more likely the business will be deemed marital property. It is best to avoid employing your spouse in your business if you want to keep the property separate from the marriage.
Businesses Founded During the Marriage
Businesses founded during the marriage are usually marital property. Barring a prenuptial or postnuptial agreement that prevents your business from becoming a marital asset, your business will likely be eligible for equitable distribution if you found it after you get married.
What Happens to Businesses that are Considered Marital Property?
Unfortunately, it is common for small businesses to fall apart or be sold during a divorce. The more involved your spouse is with the business or the larger the portion your spouse is entitled to, the more likely your business is to suffer due to a divorce. This is why it is important to keep the business as separate from the marriage as possible.
The three most common methods for equitable distribution of a business are:
Buy the Other Spouse Out
In a buyout, the spouse who desires to keep the business pays the other spouse the fair value of their half of the business. This option only works if the spouse who wants sole ownership has enough money or assets on hand to pay the other spouse for their share of the business. The buy-out option is the best way to maintain sole control of the business going forward.
Stay as Co-Owners
It is possible for spouses to stay as co-owners, either actively working together, or with one spouse as a passive owner, receiving payments as appropriate. Staying as co-owners does not work for most people. While some ex-spouses are able to maintain a cordial relationship, others are not. In addition, it may not make good business sense to have to make payments from the business to the ex-spouse while trying to maintain a healthy organization.
Sell the Business to a Third Party
If you can find a party interested in purchasing your business for a fair value, selling the business outright might be an option for you. If you worked hard to create a successful business, this option is unlikely to appeal. However, if you cannot afford to buy your spouse out and you cannot manage to act as co-owners, then selling the business may be the only option available.
Business Valuation
Regardless of how you and your spouse handle your business during the divorce, a key aspect of equitable distribution of a business includes determining its proper value. How to value the business, that is whether to use an asset-based, market-based, or earning-based approach, or a combination of the three requires lawyers who are experienced with this process.
Do You Need Help Protecting Your Business?
If you are considering marriage, and want to protect your business with a prenuptial agreement, or are considering divorce, and need to know what steps to take to keep your business safe, reach out to our family law team. Alexis and Jessica have substantial experience valuing businesses and helping their clients keep their assets safe.