Separating a shared house, children, bank accounts and pets is challenging enough. If you’ve got your own business, a divorce can take a huge piece of it.
Here are the first three steps that determine how a small business will be handled in a divorce.
Classifying your business as property
Generally, couples are encouraged to make a list of all of the assets that were obtained after the couple was married. These assets are “marital property,” meaning they’re subject to equitable division in a divorce. Anything that was acquired before the divorce, inherited or gifted to one spouse exclusively is not usually subject to division. However, businesses may be handled differently.
If marital funds were used for a business that was established before the marriage, both spouse may still be entitled to a portion of the business’ proceeds. Likewise, a spouse who chooses to work for or otherwise contribute to the business’ success may deserve a piece of the business’ earnings.
So, how much of the business would be entitled to each spouse? This question is usually best left to the courts to decide. First, they may use the following strategies to come to a decision about the overall value of the business:
- Assess tangible and intangible assets and company liabilities
- Evaluate expected income
- Compare the business with the worth of similar businesses in the market
Once the overall value of the business is determined, each spouse may be entitled to a portion that is considered “fair.” The ex-spouses may testify and provide evidence of the funds and labor they’ve put into the business to help determine this agreement.
Three ways to divide
The third step is to determine how the assets will be “split.” It’s unlikely that each spouse will continue to maintain and profit from the portion of the business they are entitled to. Instead, ex-spouses may choose to sell the business and split the profit equitably.
If one spouse wishes to keep and manage the business, they may buy out the other spouse’s portion.
Addressing special circumstances
Solo practices that are based entirely around one spouse’s skill and knowledge can be difficult to divide in a divorce. These are more common in recent years as the internet has allowed people to do freelance work and create their own startup online businesses.
Choosing to retain a business without your spouse can also be a difficult decision to make if you aren’t sure how your divorce will affect your finances. You can learn how to handle these complications by working with an attorney who has a history of satisfied clients.