Divorce changes a lot in the life of each spouse. Everything that people built during a period of marriage can change dramatically. Many people are wondering “what will happen next?” The question is especially acute when the family is engaged in its own business, and it’s not necessary if only one spouse is involved in it or both of them. If a business does not bring much income, it is not attractive to anyone, but when a business makes good money, it becomes a real goal. Of course, the separation of business during dissolution is a complicated issue and can take the process of divorce to a new level especially if you own a business together. However, there are ways to solve a difficult situation and protect your company even if you and your spouse are business owners.
Separate and Marital Property
Divorce with a business involved has features. According to onlinedivorce.com, you need to understand what type of property the business belongs to whether it’s marital (common) or separate. In general, if a firm was created in a marriage, then it is considered marital property, even if the second spouse did not put any effort into it. If a business was created before the spouses entered into marriage, then it is considered a separate asset and is not a subject of division. But unfortunately, it often happens that an insufficiently protected business, created before the wedding becomes common property, which the spouses must divide during the divorce.
Divorce and business ownership
Divorce, in any case, affects the business. Only the consequences of this influence can be different, depending on how well you managed to protect your business. Of course, the business that you created in a marriage is considered common property and must be divided based on the state law, where the divorce is filed. If the case is considered in the community property state, then most likely the business will be divided 50/50. If the marriage dissolution takes place in an equitable distribution states, then the business will be divided fairly, which does not always mean equal.
According to legalzoom.com, it is also worth paying attention to the fact that the court may consider such factors if there is a question about dividing the business that you own together:
- the contribution that each spouse has made in order to create a business;
- the extent with which each spouse was involved in business management;
- when the business was created and the percentage owned by each spouse;
- the professional value of each spouse in the conduct of business;
- sources of funds for creating a business;
- the ability of each spouse to receive a similar income outside the business;
- whether one spouse can redeem a share of his/her partner;
If you own a business, you will most likely find yourself in a situation in which you would not want to be, because the judge will have to decide the fate of your company. Depending on the state where the divorce is considered, the solutions to the situation may be different. Even if your spouse had nothing to do with the creation of a business, there is a high probability that in the process of divorce you will become business partners with him or her.
No less common are cases when your spouse will receive a larger share of other property. For example, you owned any property other than a family home or a bank account with savings. Your spouse may altogether refuse from his or her share in your firm, but then you will have to compensate his/her share at the expense of your other property, for example, real estate, bank account or other equally essential assets.
Another option may be when you have to sell a business in the divorce process and share total revenue. However, this is not the best option, and the courts rather rarely take this step, especially if the business is the only source of income.
Valuating a business in a divorce
Quite often, a company valuation including business assets and liabilities is used in case of a divorce to lay down on which part of the company each spouse can pretend while converting this part into a cash equivalent. Thus, it will be easier for the spouses to divide the property or redeem it. However, a business valuation may not always be justified. The cost of services starts at an average of $ 5,000, so you need to understand whether the valuation really makes sense. Perhaps this is not necessary at all if the business generates a small income and only one employee is involved in it.
Besides, there are risks that the procedure will be delayed, which will increase its cost. Usually, the assessment of the company is carried out by independent experts, and they need to understand all the financial flows of the firm carefully. And it’s not easy in cases where payments for services were carried out in cash and were not recorded anywhere or if the accounting was conducted in bad faith.
By and large, a business valuation makes sense when this business generates a severe income and when the spouses have something to fight for in case of marriage dissolution.
Ways to protect your business in a divorce
Protecting your business from the consequences of a divorce is quite a natural desire. Of course, you don’t want all your efforts that you spent on creating your brainchild to be destroyed. Therefore, it is crucial to take care of the fate of your company in advance, even before you or your spouse filed for divorce. So, here’s how can you protect your business from separation (according to entrepreneur.com):
- Prenuptial agreement. Although not in all cases it can save the company from division, it is nevertheless an excellent tool that regulates the current and future property interests of the spouses. However, a prenup can only be entered into before the wedding and prepared in advance, otherwise, it will be invalid.
- Postnuptial agreement. It is very similar to a prenup, but it is signed after the wedding and also regulates the property interests of the spouses. But unfortunately, the courts do not always take it into account during a divorce, but it is better to have postnup than to have nothing at all.
- Do not involve your spouse in your business, as well as collect as much evidence as possible. The less your soon-to-be ex takes part in the business, the fewer rights he or she has on your company.
- Create a Partnership or Buy-Sell Agreements, it should include provisions that protect the business owner in case of divorce or for example, the death of a partner. In general, these agreements are a good tool to protect your business from stress situations.
- Pay yourself a competitive salary instead of reinvesting in a business. This is often overlooked, but it is an essential mechanism for protecting your company. Otherwise, the spouse may want to get most of the business.
- Do not combine personal expenses with your business; otherwise, it will become marital property.
- Trust. If you transfer your business there, you will be able to remove your firm from marital property.
- Hire a good divorce lawyer
Divorce is never predicted. But if it came to separation, it can be a severe blow to both the heart and property. It is useful if you and your spouse are ready to solve all divorce issues amicably, but if this is not possible, get ready for the battle. Think in advance about the fate of your business, as it can suffer much even if your spouse has nothing to do with it. Prepare different agreements, because papers can protect you from severe consequences. In addition, hire a good lawyer who will defend your interests in court and fight for your business.
Interesting related article:
What Happens to your Business After Divorce?