Is a business in divorce separate or marital property?
A business that was started by one spouse before marriage is considered separate property although that can change pretty quickly depending on the other spouses role in the business. Because a business in divorce is a piece of property owned during the marriage, it is marital property subject to the jurisdiction of the court. So regardless of whether it was started before or during the marriage a court in a divorce case can affect each spouse’s interest in that business. In many case they can even order that the business be sold.
Often times when the business was started is not a huge distinction. That’s mostly because when a spouse is engaged in an ongoing business, the other spouse typically helps run the business in some capacity. That could be directly or indirectly by supporting their partnership in other ways. One thing we run into here is figuring out when the business became really valuable. If the business was well established before the marriage, and the volume and profitability of the business didn’t change much during the marriage, then the majority of that business might be considered separate property. On the other hand if the business was a startup and, over the course of a ten year marriage, became really profitable, both spouses will likely have more equal shares in that business.
How does the court determine how to split the business in divorce?
The court has the ability to affect a business interest even if the business was started before the marriage. In the process of determining how the business should be divided, the Court will look at several factors. Were both spouses directly involved with the day to day operations? Were there any capital contributions made by the spouse marrying into the business? Or is this the situation where the business was run, owned, and managed separately throughout the marriage?
Where a business was created during the marriage, the presumption of equal contribution is going to apply and the court will presume that each spouses interests are equal in the business. In this case, the more important questions will come down to what the business is worth, whether it is practical to sell the business, and whether one party will continue run the business after the marriage.
The thing to remember is that the court looks at a business the same any other asset like a house or a bank account. The thing that’s different about it in a lot of respects is the marketability of a business vs a different kind of asset, like a house. If one spouse is going to keep a business interest and the other is not the court is going to have to figure out:
1) What that business interest is worth,
2) Whether each spouse has an equal interest, and
3) How the person who will not continue to have an interest in the business after the divorce will be compensated for the loss in their interest.
Again, one of the biggest complications is the marketability of the business. A lot of small family owned businesses can’t be sold as easily as a house. In most cases where you have a business in a divorce, you will need to get an appraisal. There are companies that specialize in appraising business in certain industries. Whatever type of business you have, it is safe to say that there are specialists at analyzing the value of a business in your industry.
Do you need an attorney?
Hiring an attorney that has a lot of experience dividing up businesses is important. We have represented people in divorce cases who have owned assisted living facilities, wineries, and real estate companies to name a few. Remember, the attorney you choose will be presenting as an expert on your business and explaining to the court why that business is worth what its worth, or in the case where you’ve got competing appraisals, why its not worth what the other spouse says its worth. Attorneys that are not experienced to presenting that kind of information in a trial would not be a good choice in a case that involves a valuable business.
How does business type factor in?
If there is an owner of the business that is not a spouse, it gets really complicated. While the Court has the power to tell a sole proprietor who owns 100% of a business that he needs to sell that business and split the proceeds with his wife, the court is not going to have jurisdiction over the interests of any other partners in the business. They won’t be able to order that the business be sold. They can only have the spouse that is a partner of that business sell his share. This holds true for LLC’s, Corporations, and any other partnership arrangement.
A business can add a lot of complication to a divorce case. An attorney with a background in business law is gong to understand partnership and corporate structures a lot better. He will be able to advise you on how the business structure will affect the business in the divorce. Having represented several business owners in divorce proceedings, Attorney Henry LeSueur can help you protect your business through the divorce process.