Special Considerations for Business Owners in Divorce
- Your business is a significant asset
- Could your ex take half your business?
- How to keep your business in divorce
The divorce process can be particularly challenging when one spouse owns a business. In such a case, the value of the business must be determined, and it may become an asset to be divided between spouses in the divorce proceedings.
Your business is a significant asset
When determining the value of a business in divorce proceedings, the court looks at the financial statements of the business as well as any debts or other liabilities associated with it. They look at whether any marital assets were used to acquire or maintain the business prior to the divorce filing. If so, those assets may be subject to division.
The court also looks at any appreciation (or depreciation) of the value of the business since its ownership was established to make sure both parties receive fair compensation for their contributions.
What if a business was owned prior to the marriage?
If a business was owned by one party prior to the marriage but saw growth due to the efforts of both spouses, it may be subject to division. To make an equitable ruling on property division, the court examines various factors, such as the following:
- The amount of time and resources each spouse invested in the business during the marriage
- Whether either spouse significantly increased profits or the overall value of the business during the marriage
Could my ex take half my business?
It is possible for an ex to take half of a business owned by their former spouse, but only in certain circumstances. Generally, for this to happen, the business must be considered marital property under state law. This determination typically hinges on the date of acquisition as well as the purpose of the business.
For example, if the business was started while the couple was married, it could be considered marital property and therefore part of your spouse’s interest. Thus, it could be subject to the division of assets in divorce. This is true even if only one spouse bought into or started the business.
Even if a business wasn't started or acquired during the marriage, if evidence exists that something of value (such as money or time) was contributed by both spouses during the marriage, the business could be considered marital property. This could mean that your ex takes a share of the business.
In some cases, assets separate from those used to start or grow the business are commingled with assets from the business. Therefore, they are deemed part of the marital estate. This could result in an ex taking half of a business.
How can I keep my business in divorce?
One option to keep your business in divorce is to sign a postnuptial agreement. This is essentially the same as a prenuptial agreement but entered into after marriage.
A postnuptial agreement outlines each person's rights regarding assets and income earned before or during the marriage. It may include provisions to protect one partner’s ownership of a business in a divorce case.
The terms of the agreement must be fair and reasonable for both parties.
Marital settlement agreement
A carefully structured marital settlement agreement (MSA) is another way for one spouse to keep ownership of their business when divorce is imminent. This is a divorce settlement that defines how assets, like businesses, will be divided between spouses.
The settlement agreement should detail many aspects of the couple’s life, including the following:
- What each party will receive from various investments and retirement accounts
- How debts will be divided and paid
- Who will own property acquired during the marriage
- The details of any spousal support payments
- Child custody arrangements
- Child support obligations
- How real estate, personal property, and businesses interests shall be divided
- Other considerations as needed.
The goal of a marital settlement agreement is clarity and fairness regarding these details.
Are you covering everything in your Divorce Agreement?
See what most people include in their Agreements with our free download.
FAQ for business owners in divorce
How is a business valued in divorce?
This is usually done through an appraisal process, typically conducted by a professional like a certified valuation analyst or CPA. During the appraisal process, various factors are considered to determine the value of the business. These include business assets, liabilities, the potential for growth, and earning capacity.
In addition to financial documents such as tax returns and profit and loss statements, other relevant information, such as market conditions, may be taken into consideration during this process.
What if I owned my business before we got married?
If you owned your business prior to your marriage, it's more likely you'll be able to keep it. But that depends heavily on the circumstances of your marriage and finances. Did you take a large salary? Did your spouse have a job separate from your business? Did you keep marital funds separate from business funds?
The more you can answer “yes” to these questions and provide substantial evidence, the more likely you'll be able to keep your business.
What if we formed the business together?
A co-ownership could complicate matters. In this situation, the court would look at the efforts made by each of you toward the business as well as any financial resources you put forward.
Often, a marital settlement agreement is a good way to resolve this type of situation. For example, one spouse might be able to buy out the other. Legal advice is often required from a divorce attorney in situations like these.
At Hello Divorce, we offer guided online divorce plans as well as a la carte mediation services, legal coaching, marital settlement review, and more. Check out our services page to learn about these and other flat-rate services, or schedule a free 15-minute phone call to discuss your options.