Things to Consider if You Own a Business and Are Going through a Divorce
Guest Author: Chris Hildebrand
Marriage unites two people into one family. Divorce divides a couple into two individuals again. It also divides into two piles the assets they accumulated during their time together.
If you are the owner of a business, the possibility of a divorce casts a long shadow over your life. You may worry about whether your soon-to-be-ex will be a co-owner of your business.
Who Gets What in a Divorce?
Will the judge award your spouse an interest in your business if you divorce? The answer to this question depends on many factors. Some are factors anyone can figure out. Others are matters best left to the expertise of an experienced divorce attorney.
One easy factor to evaluate is whether you live in a community property state. These include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, all income earned by either spouse during marriage is community property, owned equally by both spouses. Any assets you buy with community money are community assets. These assets also belong equally to the two spouses no matter which salary actually paid for them.
On the other hand, any money or property you owned before marriage is your separate property in a community property jurisdiction. So is any money or property you inherit or receive as a gift during marriage. A divorce court in a community property state awards all of your separate property to you.
Business as Community Property
Whether your business is a community asset depends in part on when you started it and how you financed it. If you started your business during the marriage using community money, it will likely be considered a community property asset.
That doesn’t necessarily mean that your spouse will be awarded a 50% ownership interest in the business. However, it does mean that the court includes its value in the total of community assets. If you and your spouse have other community assets, other solutions are possible. The judge may award you 100% of the business but award 100% of the remaining community assets of equal value to your spouse.
If the couple does not have many other assets, your spouse still may not become half owner of the business. The court may order you to give your spouse a note for 50% of the valuation.
Business as Separate Property
All money or property a spouse owns before marriage is that person’s separate property in a community property state. Money or property one spouse inherits during marriage is also separate property. A divorce court awards your separate property to you and your spouse’s separate property to him or her.
If you started your business before your marriage, some or all of it will be separate property. Likewise, if someone leaves the business in a Will or Trust to you or gifts it to you during your marriage, that business will be your separate property.
However, in each case, the community may have a lien against the separate property to the extent community funds or effort were used to increase the value of the business.
Determining the Separate and Community Shares in the Business
Factoring out the separate property lien from the sole and separate value of a business can be a complex matter. You will want to get your attorney and accountants involved.
Some of the factors a court might consider include: How long before the marriage did you acquire the business? Did you work in the business? Did your spouse work there? How has the valuation of the business changed since the marriage? If it increased, what part of the increase was from market conditions? What part from your efforts? Your spouse’s efforts? Did you invest community money in the business?
For example, let’s say you own a coffee shop you bought before the marriage for $50,000. You manage the coffee shop during your marriage. You also invest $100,000 of community funds in the premises to add a stage where bands play music. Many clients come to hear the music and business increases dramatically.
At the time of the divorce, let’s say that the business is worth $200,000. What part of that is community property? The judge will determine how much of the increase in value is due your acumen in running the business during the marriage. This is a community lien share. The judge will also determine how much of the increase is due to the improvements made with community assets. This is also a community lien share. The portion of the increase in value due to market conditions is separate property.
In Non-Community Property States
States that are do not have community property laws usually divide spouses’ assets into marital property and non-marital property. Marital property includes each spouse’s income during the marriage and most property acquired during marriage. Non-marital property is very similar to separate property—it includes all assets and money acquired before marriage.
The divorce court in these states divides marital property “equitably” between spouses. It generally awards non-marital property to the spouse owning it. However, it can award your non-marital property to your spouse if necessary to result in an equitable outcome.
Non-marital property would include your business if you acquired it before marriage. However if you transfer an interest to your spouse, that portion will be marital property. And if you increase or expand a non-marital business during a marriage, the same complications arise as in community property states.
Get an Attorney On-Board
If you are a business owner and headed toward divorce, you need an attorney. Get an experienced divorce attorney on your case as soon as possible. An attorney will help you figure out the law and find solutions to divorce issues.
About the Author:
Chris Hildebrand, Hildebrand Law, PC
Chris Hildebrand has practiced divorce and family law in Arizona for more than twenty years. Chris is regularly consulted by other divorce attorneys regarding the interpretation and application of divorce laws in their own cases. Chris is also a prolific author regarding divorce and family law on authoritative legal websites .
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