If you own your own business, you pour your heart and hard work into it. They not only represent your passions and drives but there are also practical concerns. Especially when it comes to divorce. Is a business something the courts divide in a divorce? Can you protect your business in a divorce?
There are a lot of questions and we’ll do our best to provide some answers.
Is a Business A Divisible Asset During Divorce?
In divorce, above everything else, your business is an asset. It’s also probably one of your most valuable assets.
The process of ending a marriage is already a snarl of dividing shared assets, property, and debt. When a business factors into the equation, it presents a whole different set of problems and challenges. You must consider a number of issues and answer a variety of questions.
- Are you and your spouse business partners?
- Did you start the business before the marriage?
- Did you start the business during the marriage?
- Do you have outside collaborators or investors?
How this plays out directly impacts your livelihood and quality of life. It’s a tricky road, and with that in mind, here are some considerations to keep in mind when dealing with a business during divorce.
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Businesses Are Assets In Divorce
You likely have a deep personal connection to your business. Whether it’s a restaurant, a dog walking service, or you make artisanal hummus, you put years of your life into this venture.
Since the courts view your business as an asset, in the end, it treats it as such.
It may have great personal worth, but it also has a specific dollar value, and that’s what the court looks at. It’s one of many things to break down and distribute between you and your spouse during the division of property.
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What Are the Business Origins?
As we said above, when you started a business often has a substantial impact on how the courts divide it during a divorce.
Businesses Started During a Marriage
While you can use a prenuptial agreement to shield your business if it exists before your marriage, what can you do if you start a business during your marriage?
If you start a business while married, it will likely be considered marital property. This means it will probably be vulnerable to division in a divorce. Similar to other assets acquired during a marriage, the courts will view this as belonging to both spouses.
This unfortunately means you may have limited options when it comes to protecting your business from divorce. That said, you’re not completely without ways to cover yourself.
Just because the court views a business as the property of both spouses, that doesn’t necessarily mean it will divide the company between the two parties. The court could assign the business to you and award other assets to your spouse to offset any discrepancy.
You also have other options to protect your business during your marriage:
Postnuptial Agreement: A postnuptial agreement can help safeguard a business you start after you marry. Similar to a prenup, this contract allows a couple to specify who gets a business, or other assets, in the event of divorce. This offers one way to protect your hard work, helps shield your business, and ensures your financial future.
A Trust: Another option to protect your business during divorce is to create trust. This strategy comes with a laundry list of complicated legal concerns, but it may work in certain cases.
Businesses Started Before a Marriage
Things do change if the business predates your marriage. In this case, the court will likely view it as, at least in part, separate property. But other factors influence and complicate this status.
If you invest joint funds, that changes things. Commingling marital and business assets further muddy the waters. When your spouse invests sweat equity in the business, that also blurs the lines.
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Dividing A Business: Valuation, Division, and Allocation
One big factor that impacts business during divorce is valuation. If you have an attorney, one big decision to make is whether or not to have the value of a business appraised.
In the case of many smaller service-oriented businesses, like hair salons or construction companies, they don’t necessarily have “goodwill.” When it comes to accounting, “goodwill” refers to intangible assets that aren’t separately identifiable and quantifiable. Think reputation and position in a particular marketplace, among other variables.
In situations without goodwill, a business is worth what you can easily measure. It amounts to assets less liabilities. They create an income and are more akin to a traditional job.
But other businesses have a value beyond that. A company with high standing in its field has a higher value than one with a lower position, even though that’s difficult to put a dollar amount on.
When it comes to this type of business during divorce, a good appraiser is often critical to determining an accurate value. This, however, is not cheap. It can cost anywhere from $5000 to $15,000 depending on the specific situation.
Ways to Divide And Allocate
Much like how you have multiple options to protect your business during divorce, you also have various ways to divide and allocate a business in the settlement. A few potential strategies include:
- Buy-Out: One common option is for one spouse to buy out the other. This works best when one has more interest in continuing to run the business than the other.
- Forfeit Other Assets: As stated earlier, couples often work out a split that’s favorable to both parties. For example, in exchange for the business, you may give up any claim to a shared home or other valuable properties.
- Divide the Business: In some cases, you may have the option of splitting a company into separate businesses. For instance, if you and your spouse run an accounting firm and have distinct clients, this option may work.
- Sell Out and Move On: If it’s impossible to work out any other arrangement, your best option may be to sell the business, split the proceeds, and move on. This is often easier said than done, however. How much you sell the company for, if you can sell it at all, depends on many factors. Location, industry, competition, and demand all impact the potential dollar amount. Many businesses, especially small businesses, simply don’t sell on the open market.
- Business as Usual: This one is rare, but it does happen. In some cases, couples divorce but continue to run their shared business as usual. Sometimes marriages don’t last, but a business relationship continues to flourish. In amicable splits, this may be a realistic option.
When You Have Other Business Partners
Businesses are often expensive, intricate, and require a great deal of work. As such, they frequently involve multiple partners. Because of this, when one business partner divorces, it impacts all the stakeholders in the company. Any number of things can go wrong.
Divorce has the potential to expose the business to the scrutiny of outside assessors. Since your stake is an asset, likely one of your biggest, the courts can split it up during the division of property.
You may even have to liquidate your share in order to meet other financial obligations in the divorce agreement.
When you have business partners, it’s not only your livelihood on the line, the livelihood of others also hangs in the balance. Protecting your business in the case of divorce also protects your partners.
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Protecting Your Business Before You Marry
If you have a pre-existing business, the easiest and most common way to protect it in the case of divorce is with a prenuptial agreement.
Prenups often carry negative connotations in the public’s perception. People view them as betting on a relationship to fail or that you don’t trust the person you’re marrying. However, the reality is very different. They can be important tools to protect yourself and what you’ve built.
In business, you strive for success. You hope for the best but also plan for the worst. The same goes for marriage.
Prenuptial agreements are drafted with the hope they’ll never be needed. But having one in place can make a huge difference. Like a life vest on a boat. Hopefully, you’ll never need it, but you’ll be glad it’s there if you do. Think of it as an insurance policy.
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