Divorce brings many discussions of property division and what the future will look like moving forward. Owning a company with your spouse adds a layer of direct and indirect impacts for your business when going through a divorce. Getting ahead of expectations before you begin the process can positively support the outcome of dividing your business during a divorce.
Because every business is unique, utilizing an experienced divorce lawyer is the best first step you can take when proceeding with a divorce.
How can you divide your family business in a divorce?
Before a couple gets married or decides to start a business together after marriage, there are legal protections they can put in place to best handle their businesses in the event of a divorce. Business-owning couples who initiate a prenuptial agreement or postnuptial agreement are protecting and controlling the outcome for their business in the future. Additionally, having a prenuptial/postnuptial agreement can help you save money and time on divorce litigation because there is a clear plan to quantify who gets what.
Another way married couples can set their company up for success is to create specific agreements that help navigate how the business will be divided. Most commonly, the company will have a buy/sell, Partnership, LLC, or Shareholder agreement. Also, if the spouses are not the sole owners of a business, these agreements can help reduce the impact on the continuity and profitability of a company post-divorce.
What can you expect to happen to your business when proceeding with a divorce?
You can generally expect the laws in your state for determining your business division to be similar (if not the same) as your personal property (house, cars, etc.). In most cases, the business will be equally divided. This sounds very cut and dry, but there are a lot of factors to consider during the preparations for your settlement negotiations such as community property, spousal involvement, and what outcome you want for your business.
What is community property in a business?
Some states define community property as the property accumulated throughout your marriage. This property is owned equally by the couple and is split 50/50 in a divorce. Other states have laws that determine distribution through fairness, not equality. This type of division is called equitable distribution.
Other factors for determining the percentage of distribution can include:
- Establishment Date. If you started your business before marriage, your spouse might receive distributions from your company.
- Business Funding. Depending on the involvement of your former spouse in your business, they may receive a significant portion of distributions even if you used separate funds to start the business.
You will want to work with your family lawyer to understand what your specific state uses to determine how community property and involvement are defined.
What are common ways to divide a family-owned business during a divorce?
There are three common ways to divide (or in some cases not divide) a business when a divorce or separation has occurred:
- Selling. Selling the business is a good option for those that might not have the funds to buy out the other spouse or no longer have an interest in running the business. Depending on the health of your business and the ability to sell promptly, this can be the fastest option for dividing business assets.
- Co-Ownership. Co-ownership is an option for those that would like to continue running the business jointly with the former spouse. It can also be for those who want to draw payments from the agreed-upon marital assets but are absentee owners.
- Buy-Out. Buy-outs can be suitable for those with the funds to take ownership by in most cases, paying their former spouse half of the business’ worth.
Depending on your circumstances,
How can a family law attorney help if there is suspicion of unethical behavior regarding the business?
Family law attorneys partner with financial experts called forensic accountants or CPAs that use valuation standards to review every aspect of your business assets (earnings statements, tax filings, loan documents, etc.). If you suspect your partner has unethically managed your business, these experts will help to uncover anything suspicious. Once the company valuation is complete, you can start the settlement negotiation.
Divorce does not have to mean the end of your business.
There are different types of ways to divide a business or continue running a business with your former spouse (depending on your situation). The best advice to protect your business during a divorce is to hire a family lawyer. They will help you understand the process and work to get you the best outcome.