Divorce and Business Ownership: Here’s What You Need to Know

Dissolving a marriage can be extremely tumultuous for anyone. For business owners, the equitable distribution of assets makes a divorce case more complex. Dealing with divorce and business ownership issues at the same time requires the help of a knowledgeable divorce lawyer in Phoenix.

Discover key components of divorcing your spouse when you own a business, including spousal ownership rights and methods of business valuation in divorce proceedings. Turn to Lincoln & Wenk, PLLC if you need a professional divorce attorney to explain what ending your marriage means for your business.

Possible Outcomes of Divorce and Business Ownership

Owning a successful small business may be your pride and joy. After all, you put a lot of time and money toward building your company and achieving success. Does this mean that everything you’ve worked for all goes away if you divorce your spouse?

Some potential outcomes business owners face after a divorce include:

• Giving the ex-spouse part ownership of the business
• Owning the company in full but losing other assets in its place
• Liquidating the business and splitting the proceeds with the ex

Each of these options comes with its own pros and cons. For example, continuing the business with your ex as a co-owner allows each of you to support yourselves without changing careers, but you might face disagreements and challenges that come with this unique partnership.

Opting to retain full ownership of the company gives you complete control over business operations but could end up costing you other marital assets, such as your home or investment accounts, depending on the total value of your business. While liquidating the business provides a fair split of assets among you and your ex, it forces you to find a new career path and even affects alimony or child support payments you make to your ex.

Finding the right solution for you means understanding the equitable distribution of assets that every divorced couple agrees to.

Marital Property vs. Separate Property: What This Means for Your Business

Many business owners facing a divorce believe that they have to lose their investment because of the equitable distribution of marital property. In other words, the two divorcing spouses will fairly split the assets they acquired after they wed, such as real estate, stocks, or other investments.

Your business could be viewed as separate property and not necessarily up for spousal ownership rights. How can you characterize your business amid divorce proceedings? Below is a breakdown of both marital and separate property.

Marital Property

Say you decide to launch a new business five years into your marriage and achieve success. Your spouse isn’t involved in the business operations but because you started the business as a married person, the law views your company as marital property. This means the business belongs jointly to you and your spouse, which can create issues should you divorce.

It’s not only businesses that become marital property. Anything that one spouse purchases or invests in during the marriage is considered marital property and rightfully belongs to both spouses, including:

• Houses
• Vehicles
• Retirement accounts
• Valuable collectibles

Divorce and business ownership become murky when the company forms after the marriage to become marital property. Keep the potential business ownership outcomes in mind if you’re contemplating divorcing your spouse. They are fully within their right to stake a claim in the business if it’s a joint venture or launched by you after your marriage.

Separate Property

Launching a business before you legally marry qualifies it as separate property, along with anything else you acquire before a marriage. Unfortunately, this does not mean that your company will remain separate property forever.

Say your spouse contributes to the business by devoting time and money to its success. The law sees this contribution as a joint effort and therefore grants them joint ownership regardless of when the business began. Even if they let you handle the business operations but take care of maintaining your household while you run the business, this is seen as an indirect contribution and may change the asset’s categorization.

Separate property retains that classification if one spouse receives a gift or inheritance after the marriage. For example, if you solely inherit ownership of a family business, it will remain separate property instead of marital property.

How To Find the Value of Your Business During Divorce Proceedings

Since many small businesses end up becoming marital property, attorneys must know their value when preparing for a fair marital asset division. Couples should compile all of a business’s physical, financial, and intangible assets and determine the overall value of the business in the following ways:

• Market valuation: If you decide to squash hasty divorce and business ownership issues by selling the company, the market valuation reflects the amount you could receive at the moment.
• Income-based valuation: Calculate your net income over a set period and use that information to determine your total cash flow.
• Asset-based valuation: Find the sum of all of your business’s assets, such as real estate, bank accounts, and equipment. Then subtract any liabilities to find the asset-based valuation total.

A professional business appraiser can assist you with this vital, but complicated task. It’s crucial to find the appropriate value of your company so you can accurately navigate divorce and business ownership changes. For example, if you want to keep full ownership of your business in a divorce and it’s valued at $2 million, your spouse will need to receive roughly the same amount in other forms of marital property.

Tips for Protecting Business Interests

Difficulties with divorce and company shares pave a tough path forward for business owners. If you want to safeguard your business from the fallout of a divorce, the following tips can help.

Sign a Prenuptial or Postnuptial Agreement

While no one marries with the intention of divorcing in the future, it’s wise to prepare for any possibility. Drawing up a prenuptial agreement allows you and your soon-to-be spouse to outline assets that would remain separate property should you divorce. This contract can potentially give you full control of your business post-divorce but keep in mind prenuptial agreements must meet certain requirements, including the following:

• It’s put in writing and signed by both parties in front of a notary or other witnesses.
• Signing remains voluntary among parties.
• Courts need ample time before a wedding to verify a prenuptial agreement.

If you’re planning to marry someone as a successful business owner and don’t want to risk losing your business in a divorce, a prenuptial agreement makes it clear how you’d like to move forward with your assets. It’s possible to create a postnuptial agreement as well, though courts tend to scrutinize these contracts more than a signed prenuptial agreement.

Consider a Buy-Sell Agreement

As an entrepreneur, you don’t just have to worry about divorce and business ownership issues. You should also protect your business from unexpected events like an investment partner dying or needing to sell the business. Drafting a buy-sell agreement puts you in a good position to withstand any hardships your business faces.

Keep Your Business Separate Property

Imagine starting a business before you’re married, watching it grow over the years, and then having to lose part of your ownership in a divorce. Since the business begins as separate property, you can take action to keep it that way instead of transitioning into joint marital property. Professionals recommend keeping the business separate property by:

• Not letting your spouse work for you: Once a spouse starts to contribute to a business, it turns into marital property that both parties share. You can avoid divorce and business ownership issues with an ex if they never take part in business operations.
• Separating your personal and business expenses: Lawyers urge business owners to avoid co-mingling their personal and business assets. If you start to do this, your spouse will have a say in the business’s expenses and how it affects the household.
• Place the business in a trust: Even if your business becomes a marital asset, you can keep it separate property by opening a trust and preserving your ownership. Connect with a seasoned attorney who can help you create the trust and give you tips for protecting your business.

Failing to take the steps mentioned above can cause your ex to go after your business in a divorce. Protect your company and personal assets by being proactive about business ownership.

Meet With Our Attorneys for Legal Advice Regarding Complex Divorce Proceedings

Navigating divorce and business ownership can be difficult without a knowledgeable, compassionate lawyer on your side. Whether you need tips for working with an ex-spouse or reaching a fair marital asset division, the team at Lincoln & Wenk, PLLC can provide guidance and support. We focus on all aspects of family law, including divorce, alimony, and child custody issues.

Contact our team if you’re beginning the divorce process and need a seasoned attorney to take care of the legal requirements. Call (623) 294-2464 to schedule a free legal consultation and learn more.