How Business Ownership Affects Property Division in Divorce

How Business Ownership Affects Property Division in Divorce

Going through a divorce can be really tough, especially when a business is involved. As a business owner, you’ve probably put a ton of time, money, and effort into building your company. You don’t want to see it get torn apart or end up losing control becuase of your divorce. So what happens to a business when a married couple gets divorced? Here’s what you need to know.

Is a business considered marital property?

In most cases, yes. If you started or acquired a business during your marriage, it will likely be considered marital property or community property, depending on what state you live in. This means it’s an asset that belongs to both you and your spouse, just like your house or car or bank accounts. The court will divide it between you and your soon-to-be-ex as part of the divorce settlement.

There’s a few exceptions to this. If you started the business before you got married and kept it completely separate from the marriage, both legally and financially, then you may be able to claim it as separate property that belongs only to you. But in most cases, even if you started it before marriage, if you worked on and invested in the business during the marriage it will probably be considered marital property. The longer you were married, the harder it’ll be to claim it as separate[6].

How will the business get divided?

There’s a few different ways a business can get divided in divorce:

• One spouse keeps the business – The court awards ownership of the business entirely to one spouse. The other spouse receives other assets of equal value.
• Business gets sold – The business is sold and proceeds are split between spouses.
• Spouses continue as co-owners – Rare, but spouses continue to own and run business together post-divorce.
• Buyout – One spouse buys out the other’s share of the business.

The court will look at factors like how involved each spouse was in the business, who brought in more income, who has the skills to run it, and if there are existing business partners or shareholders to consider. The court’s goal is to divide things equitably, which doesn’t always mean a 50-50 split[3].

How is a business valued?

Before the court can divide up a business, it needs to be valued. This allows the court to determine each spouse’s share. Valuing a small, privately-held business is part art, part science. There are a few main approaches:

• Book value – Based on assets/liabilities on balance sheet. Doesn’t reflect full worth.
• Liquidation value – Estimates the cash from selling assets piecemeal.
• Discounted cash flow – Projects future cash flows and discounts to present value.
• Comparable sales – Looks at sale prices of similar businesses.
• Rule of thumb – Uses industry rules like valuing based on revenue.

Most experts will look at multiple methods to come up with a reasonable valuation. But know that there is no one “right” way to value a business, so be prepared for your spouse’s experts to suggest a very different number! [5]

Can I protect my business in a divorce?

There are a few things you can do to protect your business interests in a divorce:

• Get a prenuptial agreement – Details ownership of pre-marital assets like a business.
• Put your spouse on payroll – Documents their role as an employee, not co-owner.
• Make your spouse a minority partner – Limits their ownership stake.
• Separate business and personal finances – Easier to show business as separate property.
• Buy life insurance – Funds to buy out spouse’s share if you pass away.

But know that no tactic is bulletproof. The court has wide latitude to divide marital property equitably, especially if there is evidence of trying to hide assets from your spouse[4].

Can I work something out outside of court?

Going to trial to litigate business valuation and division carries huge risks, uncertainty, and expenses. It may make more sense to negotiate a settlement with your spouse.

You can agree to a certain valuation method, buyout price, or division of assets that you both can live with. This gives you more control over the outcome. Though it requires compromise and potentially giving up more than you’d like.

Mediation with a financial neutral can help. But you need accurate business financials and valuation projections first, so hire pros to advise you[5].

What happens if we co-own a business?

If you and your spouse are co-owners of a business, you’ll need to figure out how to split that ownership as part of your divorce. Here are some options:

• One co-owner buys the other out.
• Sell the business and split proceeds.
• Continue owning the business 50-50 after divorce.
• One gives up ownership stake and remains as employee.

Co-ownership often fails after divorce because former spouses can’t work together. One usually wants to move on with their life while the other may still feel attached. Sharing ownership of a major asset makes this difficult:

• Requires regular communication and coordination, even when you’d rather not interact.
• Financial entanglements continue, like splitting mortgage and taxes.
• Major business decisions need agreement, which can get complicated.
• If one co-owner wants to sell, the other may not.
• New romantic partners often aren’t comfortable with the arrangement.

That said, co-ownership can work if both spouses feel it’s in their best interest and are committed to making it succeed. It helps if spouses get along reasonably well and stay focused on joint business matters. Clear written agreements are essential.

Some tips for successful co-ownership after divorce:

• Communicate through attorneys or in writing to avoid misunderstandings.
• Draft a detailed co-ownership agreement covering all potential issues.
• Be transparent about finances and business operations.
• Don’t make decisions unilaterally – discuss together.
• Consider mediation if disputes arise to avoid court.