What Happens To Your Business In Your Divorce?

Divorce undeniably alters every aspect of a couple’s life, particularly when it comes to the assets they’ve built together throughout their marriage. The complexity of this process magnifies when a family-owned business is involved, regardless of each spouse’s level of participation in the company. The financial viability of the business becomes a significant concern, as a profitable venture inevitably becomes a central point of contention during asset division.

Understanding Separate and Marital Property

When navigating a divorce with a business in the mix, it’s crucial to discern whether the business is considered separate or marital property. Typically, a business founded during the marriage is deemed marital property, irrespective of the other spouse’s direct involvement. Conversely, businesses established prior to the marriage are generally categorized as separate assets, and thus, not subject to division. However, without adequate legal protection, even pre-marital businesses can transform into marital property, necessitating division during divorce proceedings.

The Impact of Divorce on Business Ownership

The impact of divorce on a business varies, heavily dependent on how well one has safeguarded their enterprise. Businesses established within the marriage are considered communal property, and their division is subject to state laws. In community property states, an equal division is likely, while equitable distribution states prioritize a fair — though not necessarily equal — division.

Factors that courts may consider during this process include:

• Each spouse’s contribution to the business
• Their roles in business management
• The business’s establishment timeline and ownership percentages
• The professional value of each spouse to the business
• Initial funding sources
• Each spouse’s potential to earn a comparable income independently
• The feasibility of one spouse buying out the other

Valuing a Business in Divorce

A thorough business valuation, inclusive of assets and liabilities, often plays a pivotal role in divorce proceedings, helping to determine each spouse’s stake in the company. This process aids in transforming these stakes into monetary terms, simplifying property division or buyouts. However, business valuations are expensive, starting at an average of $5,000, and may not be justifiable for smaller, less profitable enterprises. Additionally, this process can be prolonged and complicated, especially if financial records are incomplete or inaccurately maintained.

Protecting Your Business in Divorce

Proactively safeguarding your business from the repercussions of a potential divorce is crucial. Consider the following strategies:

1. Prenuptial Agreement: Though not foolproof, prenups are valuable tools for delineating current and future property rights, provided they are established well in advance of the wedding.
2. Postnuptial Agreement: Similar to a prenup but established after marriage, these agreements can also help in protecting business assets, despite not always being upheld in court.
3. Limit Spousal Involvement: Minimizing your spouse’s involvement in the business and gathering ample evidence to support this can reduce their claim to the company.
4. Establish Partnership or Buy-Sell Agreements: Including provisions to protect the business owner in case of divorce or other contingencies.
5. Pay Yourself a Competitive Salary: This prevents the argument that your spouse is entitled to a substantial share of the business due to reinvestment of what could have been household income.
6. Avoid Mixing Personal and Business Expenses: This helps in maintaining the business as separate property.
7. Consider a Trust: Transferring business ownership to a trust can further protect it from being considered marital property.

Engaging a Competent Divorce Lawyer

While divorce is unpredictable, preparation is key, especially when a business is at stake. Crafting clear agreements and engaging a skilled attorney to defend your interests ensures that both your emotional and financial investments are protected. Preemptively addressing the potential impacts on your business not only safeguards your livelihood but also ensures a more straightforward navigation through the complex terrain of divorce.