Many business owners have worked a long time to build their business. From accountants, doctors, and lawyers to plumbers, electricians, and air conditioner repair technicians, business owners work long hours to make a living, make a profit, and in many cases, provide for their families.
When faced with a divorce, there are additional questions to be answered than there would for one or two W-2 workers. Will the business be closed, or lost to the divorce? Can the business continue without the spouse, or will they be a 50/50 partner? That depends on a few different factors. Here, we discuss your options.
What Type Of Business Do You Have?
A sole partnership or small business is likely one with limited revenue and minimal assets, so it’s easy to handle in a divorce and will most likely be awarded to the owner’s spouse. If the owner is the reason for its profitability, the “goodwill value” will go along with it, since it is of little value to the non-owner spouse.
Because professional licenses cannot be transferred, businesses like law firms, medical offices, and accounting firms can’t be owned by a non-licensed professional. The exception is if that spouse also holds a professional license.
A business owned and operated by both parties may be more difficult to divide. Franchised businesses may have their own rules from the companies if the owners are married and the business is community property. This may make disposition more difficult.
In the case of a larger business or corporation with considerable assets and company stock, the court could award the business to one spouse and order the sale of company stock to pay to the other. A company that isn’t publicly held with stock may require a formal business evaluation to determine its worth in order to correctly and evenly divide assets in the community estate. You’ll need to find a business appraiser who has either the Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA) credentials in business valuation to help.
Is The Business Separate Or Community Property?
Separate property is anything that was acquired or founded prior to the date of marriage, as well as things like accident settlements and inheritances, no matter what the date. This can include part ownership or inheritance of a family-owned business. It’s important to keep records of everything that’s separate property as well as list them in any prenuptial or post-nuptial agreements. This includes the funds used to start the business.
One of the biggest factors is the use of revenue generated by the business. Does the money go to community purposes, such as rent/mortgage payments and other household expenses? Or is it kept separate from the community bank accounts?
An increase in value may also be considered part of community property, even if the funds aren’t commingled. Additionally, if community funds are invested in the separate property business, it may be “converted” into community property.
Generally, any money that’s deposited into a joint bank account and used for marital expenses is considered community property. This includes money from a business that’s considered “separate property.” Once the money is used for community expenses or is commingled into a community bank account, it becomes community property.
If you or your spouse have “day jobs” but also created, bought, or inherited a business prior to marriage, the business and the revenue are separate property. Unless converted to community property, this money would not be part of the divorce. The wages and income from the “day jobs” from the duration of your marriage would be considered “community property” with the separate funds from the business kept outside of the divorce proceedings.
Who Runs The Business?
In many smaller companies, one spouse is involved with “back-office” operations such as accounting, billing, or other administrative functions while the other conducts the company’s business.
Does one spouse own and run the business or are both owners involved in the day-to-day operations? In this case, it may be difficult to decide on splitting up the business, especially if it’s profitable and provides family income. Third parties may complicate matters.
It’s possible that one spouse may be required to sell part of the business to “buy out” the other spouse, making payments with a structured payment schedule. The judge could also award them other property that amounts to the worth of their share of the business, such as a house, car, or other assets, allowing the business to remain in the possession of the founding spouse.
Another option is to sell the business outright and split the proceeds between the two spouses. Splitting allows one or both partners to start a new business with their share of the proceeds. This a possibility if the business doesn’t have enough assets to buy out the other spouse. It also helps the court avoid the issue of determining the spouse who “deserves” to keep the business.
In some cases, both spouses may decide to remain business partners. It’s a delicate balance to work with someone who was your spouse and continue working in the business. Sometimes, it works, but sometimes it doesn’t. This would be a decision for you and your soon-to-be-ex. Should the judge decide that it would be the best option and that you could work amicably with your spouse, it’s more likely that the judge would order this kind of arrangement.
If you and your spouse are considering a divorce, you should review your prenup or postnup agreements, as well as your business documentation (such as articles of incorporation.) A business evaluation will give you a view of how much your business is—and isn’t—worth. When you discuss everything with your attorney, you’ll have a clearer picture of what will happen to your business in a divorce situation.
Fort Worth’s Compassionate Divorce Attorney
Wendy L. Hart is an experienced family law attorney helping people throughout Tarrant County who need help in a divorce. As a divorcee herself, Wendy understands the process as well as the difficulties involved. We represent both men and women. We’ll make sure you’re treated fairly and will protect your interests and your children.