Successfully launching and running a business requires commitment and passion. It can be an exhilarating ride; the pride that comes from building something long lasting is hard to top. However, too often the journey never ends, and it can be all-consuming.
Sometimes, despite the best efforts and intentions, the commitment and passion for one’s business can contribute to strains in other aspects of one’s life, leading to a struggling marriage.
When a person who is facing divorce owns a business, or is a co-owner, the question comes up whether the divorce will force the liquidation of the business. In most cases, the simple answer is “no.” That said, a business will likely be considered a marital asset that will be valued as part of the financial analysis in the divorce.
Assets (less liabilities) owned by both or either spouse during the marriage are generally considered part of the marital estate. This includes savings, real estate, debts and business ventures.
Four exceptions to what is considered marital are:
- Gifts, Bequests and Inheritances: Any gifts/bequests/inheritances one party receives from a third party, which are kept in separate title, are not considered marital assets and are valued as of receipt. The increase in value is marital.
- Acquired pre-marriage: An asset owned prior to the marriage which is kept in separate title is not considered marital. The increase in value during marriage is marital.
- Acquired post-separation: Any asset acquired after separation with non-marital funds is not marital.
- Protected by a prenuptial agreement: All assets acquired before and in some cases during a marriage can be protected by a well-drafted prenuptial agreements.
When looking at a business, if it was started and built during the marriage the business is considered a marital asset. Businesses began before the marriage, have a non-marital value at date of marriage. If the business grows during the marriage, the increase in value is marital.
If a business is identified as a marital asset, or with some marital component, the marital value of the business will need to be determined if a divorce is initiated. The non-owner spouse has the right to know if it is marketable, if the business has significant assets, if it successfully generates excess income to the owner. In some circumstances, however, a business succeeds due to almost entirely upon the personal goodwill of the owner; in such cases, it may have modest value to distribute. In most cases, the courts want the business to survive the divorce as an asset of the owner spouse, especially where the family has been relying on the business to produce income.
It’s unusual for a court to expect marital partners to become partners in a business interest. While the non-business-owner may have a claim to the value of the business, most judges and masters recognize that making an ex-spouse a partner in a business is a recipe for disaster. Instead, the courts will often accommodate a buyout over time of the non-owner’s economic interest in the business rather than trigger financial hardship for the business owner. The court should seek to mitigate financial strain on both parties and any children of the marriage.
If the non-owner spouse works in the business, the owner should be wary of the spouse/former spouse actively hurting the business. A spouse who calls customers or comes to the office and misbehaves may be found at fault for trying to retaliate against the business owner for personal reasons. This could hurt the value of the asset and the source of future income. If the spouse is employed and engaging in this type of behavior, he/she will be terminated.
Compensation generated from the businesses which is in savings is also considered marital property. Investments and retirement savings accumulated through date of separation will be equitably divided. Future child support and alimony will be based on the owner-spouse’s income. Beware: if the business is valued based on excess earnings, the business owner will argue the non-owner spouse cannot double-dip. If the non-owner is getting the value of the excess earnings in equitable distribution, those excess earnings arguably should be removed from income available for support.
The end of a marriage is stressful enough; the fear of potentially losing one’s livelihood at the same time can be frightening. Additionally, an important consideration is the toll of divorce litigation on one’s ability to keep up the same pace of work. The ability of the business to survive the divorce needs to be evaluated by the owner.
The owner will want to have an advocate who is in tune with the range of possible litigation. If the litigation becomes brutal, the non-owner spouse may doom the business, and the goose that lays the golden eggs.
Visit the Family Law page here.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.