Divorce When You Own a Business
March 22nd, 2022
Divorce is a difficult experience in any circumstance. Every aspect of your life will experience some amount of upheaval. Getting a divorce when you own a business presents a distinct set of challenges that can affect you, your family, and your business partners. You will need to determine the value of your interest in the business, as well as how much of it should be included in the marital property division. An experienced divorce attorney for business owners can guide you through this process. They can advise you of how your divorce could affect your business and help you assert your rights with as little disruption to the business as possible.
Business Ownership in a Divorce
In order to divide business assets in a divorce, you must first determine exactly what part of a business you own. A business can be informal with one or more owners, or it can be a business entity organized according to the laws of Connecticut or another state. The two spouses could be partners in a business, or one spouse could own a business by themselves or with other people.
Proprietorships and Partnerships
An informal business with only one owner is known as a sole proprietorship. If it has two or more owners, it is a general partnership. Ownership interests are typically expressed as a percentage. The owner of a sole proprietorship, for example, owns one hundred percent of the business. A partner in a general partnership might own fifty percent of the business, one-third of it, or some other percentage or fraction.
An important difference between an informal business and an organized business entity is that the owners of a sole proprietorship or a general partnership have no legal protection from business liabilities. If the business gets into financial trouble, the individual owner or partners could get stuck with the bill.
Organized Business Entities
Businesses may organize themselves into a formal structure like a corporation, limited liability company (LLC), or limited partnership. This creates a distinct legal entity separate from the business owners, with the owners shielded from liability for business debts.
Owners of a corporation are known as shareholders. They own shares in the business. LLC owners are typically known as members. Their ownership could be represented by a number of shares, similar to a corporation, or as a percentage like in a partnership.
What Happens To a Business in Divorce?
Once the parties to a divorce have determined the nature of the business ownership, they can work on establishing the business’ value and the value of the spouse’s portion of the business.
Valuing a Business for Divorce
Business valuation can be a tricky process. It requires an analysis of the business’ assets, debts, other liabilities, income, and expenses. A financial professional who specializes in business valuation often needs at least five years of tax returns and financial statements.
Numerous options for determining the value of a business are available, such as:
- Asset-based: The value of the business equals the difference between its assets and liabilities, as shown on the balance sheet.
- Liquidation: The business is worth the total value of its assets.
- Income-based: The value is based on projected future income.
- Market-based: The value is derived from comparisons to recent sales of similar businesses.
Dividing a Business in a Divorce
In a divorce action, Connecticut court has jurisdiction to divide all property of either spouse in any manner the judge thinks is fair and equitable. This includes property acquired before the marriage, as well as property acquired during the marriage. But the efforts of each spouse in creating value are an important factor in determining what is fair and equitable in each case. In practice, the spouse that built the business often gets to keep it, or to keep a larger share of its value.
The process for actually dividing the business equity depends on the type of business and the relationship between the parties. Splitting one spouse’s shares in a corporation might be relatively simple. Dividing a spouse’s one-third ownership in a general partnership is likely to be more difficult. The help of a divorce attorney with experience representing business owners is essential.
The responsibilities that come with business ownership present another challenge. A business owner has the right to a share of business profits, but they also have duties of care to their business partners, clients, customers, and others. If the two spouses were not business partners before the divorce, it is rarely viable for them to be co-owners of the business afterward. They might not want to run a family business together once the divorce is finalized. The business might have bylaws or other regulations that restrict bringing in new owners.
It is often necessary for a business owner spouse to “buy out” their soon-to-be ex. This could be a literal buyout with a cash payment, or with payments over time. As an alternative, they could agree to balance it out with other marital property.
Getting a divorce can be difficult for anyone, but it presents particular challenges for business owners. The business divorce attorneys at Lawrence & Jurkiewicz represent people in Hartford and Litchfield County who need help with these kinds of complicated family law issues. Please contact us today online or at (860) 264-1551 to schedule a confidential consultation to see how we can help you.