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What Happens to My Business If I Get Divorced?



Divorce can be a painful and stressful ordeal in which your life is in turmoil, your assets are in jeopardy, and even your best laid plans have left you “nought but grief an’ pain [f]or promis’d joy.”[1]  If you have a family-owned business to divide up, your grief and pain may be that much worse because you are also wondering what could happen to your primary source of income.

If this is one of your questions, consider that the fate of your business will likely depend on any number of factors, including whether your business is marital property, whether you have taken precautions to protect your interest in your business, and the overall fair market value of your business.

What Property is Marital Property?

One question to ask when facing a divorce is whether your business will be considered marital property or premarital property.  This is important because in a divorce, premarital property is usually “considered separate property and will be retained by the party who brought it into the marriage.”[2]  As a result, if you started your business after you got married, your business will probably be considered marital property.  However, even if you started your business before you got married, your spouse may still receive an interest in the business if she contributed premarital assets to the business or helped you to grow the business during your marriage.[3]

How Can I Protect My Business Before a Divorce?

Protecting your business from the possibility of divorce may feel like telling your spouse that you don’t trust her.  However, many business owners have been spared significant expense and hardship because of prenuptial agreements, buy-sell agreements and other legal instruments designed to minimize the disruption to their businesses in the event of a divorce.[4]  Other helpful precautions can include keeping your family and business funds separate and paying yourself an appropriate salary.[5]

How Do I Split the Value of My Business in a Divorce?

If it appears that divorce has become unavoidable, one of the first steps in dividing your business is establishing its fair market value.  A good way to do this is to use a professional, neutral evaluator to provide a reliable estimate.[6]  Consider also that you may not want to sell your business to a third party, if you can avoid it, if the business represents a source of future income as well as a current asset.  That being the case, many divorcing couples will agree that keeping the business makes more sense than selling it, especially if the only interested buyers are trying to get it for less than its fair market value.  In these situations, you may be able to keep your business by purchasing your spouse’s interest in the company,[7] perhaps by paying at the time of the divorce with cash or other marital assets or making payments over time.

Conclusion

Divorce is not something that I wish on people or enjoy seeing.  However, most business owners realize that bad things happen sometimes and that it can be extremely helpful to have good damage control measures in place before disaster strikes.  So, if you want to protect your interest in your business against the possibility of divorce, look for ways to ensure that it will be treated as premarital property, consider a prenuptial agreement, and remember that you may need to purchase your spouse’s share of the business in the divorce.

 

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References

[1] https://www.poetryfoundation.org/poems-and-poets/poems/detail/43816.

[2] Rappleye v. Rappleye, 855 P.2d 260, 263 (Utah Ct. App. 1993).

[3] Id. (“At trial, there was evidence that a portion of Mrs. Rappleye’s premarital assets were commingled in the hardware store operations and that Mrs. Rappleye worked at the store during the marriage without a wage or salary. The trial court, however, in awarding all of the proceeds from the sale of the store to Mr. Rappleye, apparently never considered Mrs. Rappleye’s contributions in determining what financial benefits, if any, accrued to the hardware store by virtue of her contributions, financial or otherwise, during the period of the marriage.”).

[4] http://www.cbsnews.com/news/who-holds-onto-the-family-business-when-couples-divorce/.

[5] https://www.entrepreneur.com/article/220124.

[6] http://www.alliedbizgroup.com/resources/publications/business-valuation-issues-divorce.html.

[7] http://www.cbsnews.com/news/who-holds-onto-the-family-business-when-couples-divorce/.