Divorce is hard enough on its own, without the added stress, hassle, and expense of diving a business. But if you co-own a business with your soon-to-be-ex-spouse, you may find yourself having to make some difficult decisions about the future of your jointly-owned business.
What Happens to Your Business During Divorce?
When it comes to dividing assets in a divorce, most assets and property are classified as either marital property/assets or separate property/assets. Marital property refers to assets acquired during the marriage, with some exceptions, whereas separate property was typically owned before the marriage, or acquired following separation. In some instances, property may be classified as both marital and separate.
When you are going through a divorce, a business owned by both you and your spouse will likely be considered to be an asset. As with all assets, the two of you will have to decide how, or if, this particular asset—your jointly-owned business—should be divided. To determine your options and protect your best interests following the divorce, consider the following:
Is Your Business Considered to be Marital Property?
Laws on marital property vary from state to state, but it is very possible that your jointly owned business constitutes marital property. Depending on several factors, including whether you owned the business prior to getting married, you may be able to claim it as a separate asset. But even then, you will have had to take certain steps along the way to protect your business’s status as a separate entity.
In order to protect a business that you owned before marriage (separately from your spouse) from becoming marital property, you must keep it separate from other marital property, including bank accounts.
Having a prenuptial or postnuptial agreement stating that the business is a separate asset can also protect it in a divorce. Putting your business in a trust or setting up an LLC are other possible modes of protection, but the level of protection depends largely on multiple factors, including your spouse’s role in the business. If, for example, your spouse made large financial contributions to the business during your marriage, these aforementioned protections may be limited, to say the least.
Valuing the Business
If it is determined that the business is marital property and must be divided, step two is to value the business. If you live in a community property state, marital property is divided 50/50, or straight down the middle, as with all marital assets. In equitable division states, on the other hand, the division will be based on myriad factors.
In some cases, a spouse will agree to relinquish interest in the business in exchange for other property or assets, including the family home. In other cases, the spouse may walk away with a cash buyout. Other factors, such as whether either spouse is paying child support or alimony, may also come into play when determining business division in a divorce. For these reasons and the fact that valuing a business as a marital asset can be extremely difficult, it is in your best interest to work with a divorce lawyer experienced in business division.
Three Primary Methods of Division
In addition to the challenges of valuing a business that is classified as marital property, joint owners must consider how the division will impact the business’s structure, reputation, longevity, and/or bottom line. The three most common methods divorcing couples typically use to divide a jointly owned business in a divorce are as follows:
1. Cash Buy-out
The most common method of business division in a divorce occurs when one spouse buys out the other’s interest in the jointly owned business. If the partnership was equal (50/50), then the cash buy-out is, in theory, 50 percent of the business’s value. However, division is rarely this straightforward. Let’s say that the business is worth a million and Lou and Gretchen own it 50/50. Lou should get 500k in a cash buy-out, right? But what if Lou also owes 75k in back child support that was ordered after their separation? Can Gretchen reduce the cash paid by that amount? And what if Gretchen doesn’t have 500k on hand to buy out Lou? Can she concede interest in another asset, such as a retirement account or second home, to offset the shortage?
Cash buyouts can be complicated and messy. As such, it is in your best interest to work with a divorce lawyer experienced in business division if you are facing a similar situation.
In some cases, amicable ex-spouses who both want to remain involved in the business choose not to split it at all. This is certainly the easiest option from a legal and financial perspective, and it may be best for the health of the business, but it is rarely a feasible option. For co-ownership to be a viable solution, there must be mutual respect and trust, and these good relations should be expected to continue indefinitely.
3. Sell the Business
For many divorcing couples, the end of a marriage is also the end of an era; this often means the end of the jointly owned business. When neither spouse wants to remain involved in the business, it may be best to sell it and divide the profits equitably. Again, doing so with an experienced attorney by your side can ensure the cleanest, fairest division of assets.