Although it isn’t a pleasant statistic, it is reported that around 41% of first marriages will end in divorce. Even worse, around 50% of all marriages will end in the same manner.
In the US, there were 1,676,911 marriages in 2020. There were 630,505 divorces in 2020 also though. While divorce is never pleasant, some are far more complicated than others. Some marriages end in acrimony due to personal reasons, while others simply have lengthy divorces because of financial or business complications.
If a business is involved with one partner being an owner, how are the assets dealt with in divorce? What if the company is a family business, and both spouses are involved?
Will your divorce affect your business?
What will happen is that the business will be appraised, and its value worked out. To do this, a qualified appraiser must be brought in to look at the company’s hard assets, liquid assets, and liabilities. Intangible assets will also come into play in the business’s valuation.
Any money held in bank accounts will be entered into the equation, but so will outstanding debts, credit lines, and other liabilities such as rent, or leases held on equipment.
How the divorce affects the business will depend on the state you are in, and how the judge views the case. A family law expert will help guide you through the divorce process. Divorces can be contested or uncontested, and GSRM Law explains that in the case of business assets they can be subject to equitable distribution, or classed as community property.
What is equitable distribution and community property in a divorce?
Businesses can be affected by divorce in many ways. The reputation of the firm can be affected adversely through a messy divorce. If both spouses were involved in the day-to-day running then some clients may choose to leave to follow one particular partner.
However, the biggest effect a divorce can have on a business is how the assets are split up. Some states favor what is known as equitable distribution, and others, community property.
Full financial disclosure in a divorce must happen. Hiding assets not only hinders fair and valid decisions by the judge but also puts the spouse responsible in contempt of court.
With full disclosure, a proper valuation of the business will have been made. Then in some states, the debts and assets accrued in the marriage will be subject to equitable distribution.
This means the judge will use their experience and judgment to fairly divide everything according to its equity. This doesn’t mean everything is divided equally, but it should be equitable.
Tennessee is one such state that uses equitable division to decide on asset and debt distribution.
In states that use community property to divide assets and debts, the process is similar to equitable distribution. The main difference is that equitable distribution is not an equal divide but one that is deemed to be fair to both parties. Community property is a straight-down-the-line equal division.
Only nine states use community property to divide up assets, including Texas, Nevada, and Arizona.
How will the business’s assets be divided when you divorce?
If you feel that you alone ran and operated the business, then you may also feel that you should be able to keep it. As a business owner, you will want to protect your assets and shield your company. Many judges will agree with this depending on the circumstances.
If both spouses helped to make the business a success and both played an active role then things can become a little more complicated. But if it was only you who was concerned with the day-to-day operations then a judge may see no benefit in dividing up the business.
Equitable distribution allows for one partner to keep the business and its assets but the other spouse to receive fair compensation in other forms. This may mean the family home or other assets.
What happens if it is a family business?
When it comes to dividing up assets from the business, there will be several factors considered.
- Can you buy your partner out?
- Were you and your spouse both involved in running the business?
- Did you own the business before the marriage?
- Will your spouse be able to earn a similar income without the business?
- Does your spouse bring intangible assets to the business? E.g., customer relations
- Are family funds tied up in the business?
There are 5.5 million family-owned businesses in the US today. Of course, the largest of these is Walmart which is the biggest family business in the world. Out of all these family owned businesses, it is a fact that some spouses will divorce.
When both spouses are involved in a family business, a judge will have to use the criteria above and more to decide on how to divide assets. It is usually in the best interest of the couple to come to an agreement themselves to avoid the termination of the business.
Divorce can be messy, and when businesses are involved, it can make matters far trickier. How the assets are divided in divorce will differ slightly depending on whether they are treated as community property, or if equitable distribution is used.
Prenuptial arrangements can help to protect a pre-existing business, but one created during the marriage will be subject to valuation, and the assets may be divided. Often though, a judge will see the termination of a business as undesirable. Equitable distribution allows for other assets to be used to make the balance fair.
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