Divorce Involving a Business
You may feel that you alone own your business, but the law might see things differently during your divorce. In many cases, businesses are joint marital property and are included in the process of property division. Figuring out what happens to a business during divorce depends on the state you live in, its marital property rules, and the value of the company. It is important to enlist the help of an attorney early in the process if you are facing divorce and wish to protect your investment in your business. Petrelli Previtera can help.
How are businesses valued during a divorce?
Valuing a business is much more complex than it may seem. In order to determine the value of a business, one must consider:
- Tangible property (assets)
- Intangible property
Often, the business valuation process begins with a qualified appraiser’s full inventory of the tangible property owned by the company. This includes any machinery used to manufacture items, in-stock inventory, and even office equipment. Buildings also fall into this category if you own them outright. The cash in business bank accounts counts too.
In addition to tangible property, businesses also have liabilities. These liabilities are an important part of the equation when determining value. Rent on a building or equipment lease, credit lines, or regular outgoing payments for services are some of the most common types of liabilities.
Intangible assets are more difficult to value, but important to a business’s bottom line and ultimate success. These intangible assets include goodwill, a concept that relates to how customers, potential customers, and others view the business. Customer relations play a key role in goodwill, as does participation in the community. It is important to note that oftentimes one partner is “the face” of the business in the community, which ties that partner directly to the goodwill and success of the business.
Lastly, the team tasked with valuing the business must calculate the profit of the company, so expect a thorough review of your company’s financial records.
How are businesses divided during divorce?
It is important to recognize that just because you ran the business does not mean you will receive 100 percent of it. State divorce laws vary, so where you live will impact how the court will divide your marital assets including businesses. Some states use equitable distribution, such as Pennsylvania and New Jersey. In these states, spouses must split business and other marital property fairly, which is not necessarily equally. The court will consider the role of each spouse in acquiring, building, and running the business in addition to their contributions to running the house and family. In many cases, the court will award the business to the spouse who ran it but will grants the other spouse other marital assets to offset the value of the business. Or, when both spouses worked hard to build the business, the court may award a share of the company to each spouse.
Others are community property states, such as Texas and Washington. In these states, there is a 50-50 split of property acquired during the marriage. The court will generally consider a business started during the marriage to be community property. With regard to companies started before marriage, the entire business is not necessarily separate property during divorce. It depends on a variety of factors, such as whether both spouses contributed to the business during marriage and how the spouse who owns the business was paid.
What do courts consider when dividing a business?
After an appraiser has determined the value of a business, depending on the state, the court may consider a number of factors:
- Whether the business existed before the marriage, and the percentage owned by each partner
- How involved each spouse was in running the business
- The value each spouse personally brings to the business, including professional qualifications and customer relationships
- Whether one spouse borrowed from family funds to buy something for the business
- Whether one partner can buy out the other
- How the spouses divide the remaining assets and liabilities
- The ability of each individual to earn a similar wage outside of the business
A family law attorney familiar with this unique type of divorce case can review your circumstances and discuss potential outcomes.
Contact Our Lawyers for Assistance
We know a business can be a major asset. Ensuring the company is divided appropriately during divorce is critical. The lawyers at Petrelli Previtera, LLC represent divorcing spouses in many states around the country, many of which involve businesses. We can ensure you receive a correct valuation, guide you through the process, and fight for your right to your fair share of the business and other marital assets.
If you have concerns about protecting your business during divorce, we can help. Contact us at (866) 465-5395 to schedule an appointment to consult with a lawyer regarding the specifics for your state and unique situation.