As with anything in separation and divorce, circumstances are complicated when it comes to who gets what- this could mean anything from debt to pets to furniture. Compound that by navigating your business and divorce. You certainly want to know how to protect the things that are important to you. Often that means working with a skilled attorney to make sure all interests are protected. At a minimum, it means having a solid understanding how the laws are interpreted and how they impact you.
As we covered in our blog, Splitting Property in Divorce: A Tutorial with Real Life Scenarios, marital assets are subject to equitable division in a divorce. This includes business interests. There are a multitude of factors and circumstances that could affect how business interests are handled in a divorce. This paper aims to address some of the more common scenarios we have encountered.
Scenario #1: You and your spouse are business partners.
You and your spouse could opt to keep things professional and continue running the business as partners, post-divorce. However, differences and disputes could lead to disaster for the whole business, as well as your sanity. What can you do if you anticipate this?
- Determine you and your spouse’s share of the business’s debts and assets. This can be tricky to do and may result in lengthy courtroom litigation, especially if you both have made separate and marital investments. Of course, you and your spouse could always try to reach an agreement amicably. Bringing in a third-party such as a mediator could help.
- Consider hiring a professional to conduct a business valuation. Depending on the type of business you have and what you want to do with the business going forward determines the best approach to use. There are three main approaches to appraise a business:
- Asset Approach looks to the totality of all assets and liabilities the business holds to determine its overall value.
- Market Approach looks to recent sale prices of similar businesses to determine the fair market value of your business.
- Income Approach looks to the past income levels of the business and determines the projected future income for the value of the business.
Once the business has been evaluated, the assets and debts fully determined, and you and your spouse have your respective interests established, now what? Well, if you know that you and your spouse will no longer be able to work together, your best option may be to have your spouse buy you out of the business, or vice versa. You or your spouse can seek a settlement in the form of a lump sum or structured payments, the other will have full control of the business, and you go your separate ways.
If being bought out doesn’t work for you, or neither you or your spouse want to continue the business, you can ask the court (or agree with your spouse) to have the business sold and then you and your spouse will get your respective interests in the proceeds.
Scenario #2: You are a minority partner in a business.
In a partnership, minority partners own less than 50% of the business, which means generally they have fewer responsibilities as well as less rights and decision-making power than the majority partner(s). The extent of what a minority partner’s rights and responsibilities are would presumably be set out in detail in the business’s partnership agreement.
If a minority partner goes through a divorce, their interest in the business is subject to distribution just like any other business interest. This means that the business will still need to be evaluated, and the partner’s share of the assets and liabilities determined.
The court will grant your spouse an equitable distribution of your minority interest in the partnership. This may entitle your spouse to a certain share of income from the business, among other things. Worst case scenario, your spouse can even ask the court to dissolve the business to receive their share in the proceeds. The partners will want to make sure the partnership agreement has clear terms for these situations to mitigate any possible damage and protect the business.
Scenario #3: Your business partner is getting a divorce.
Best case scenario, you and your business partner have already planned for all possible scenarios, including a divorce, and made sure a prenup was in place or the partnership agreement is well written to protect the business. However, in all the things that must be done when starting a business, a divorce occurring somewhere down the road may be the last thing on your mind.
You will certainly want to talk with a lawyer if you find your business partner going through a divorce. If no prenup or other arrangements have been made, half of your partner’s business interest may be subject to distribution to their spouse. The court will assess your business and determine what the partner’s interest is, which may require extensive record and document review. Additionally, it is likely that the business entity would be named a party to the divorce action.
Your partner’s lawyer is going to be concerned with protecting their interests, but not necessarily the business as a whole. Having your own lawyer or at least an attorney to represent the business entity can help you protect the business and be ready to join the divorce case to object if any sensitive or confidential business documents are being subject to discovery. A lawyer can also help you make sure that your partner’s interest has been correctly determined and more of the business is not being subject to distribution than is proper.
Scenario #4: You want to start a business before your divorce is final.
If you know you are going to get divorced, or are already in the middle of divorce proceedings, now is absolutely not a good time to start a business. Contested divorces are supposed to be finalized in no more than 18 months per the Ohio Supreme Court Guidelines, but realistically it can end up taking even longer. During that time, until the judge has signed an entry declaring you and your spouse divorced, you are still legally married. By starting a new business while still married you are likely using some marital assets to purchase or fund the business, which will make your interest in the business subject to division. Besides that, if you increase your income/earning capacity before the divorce has been finalized, that may impact how the court decides equitable division of other marital assets. While you may have a great idea for a business and are itching to get it going as soon as possible, the best thing to do is just wait a little longer until the divorce is final.
Scenario #5: We had a prenuptial agreement defining my business as a separate asset. Since we were married, I have sold that business and started a new one.
You are probably wondering if your new business is protected under your prenuptial agreement. The answer here is every lawyer’s favorite saying – it depends. The wording of your prenuptial agreement is very important. If your prenup only specifically names your premarital business as being separate property, chances are the new business started during the marriage would not also be considered separate property.
If you plan, there are terms which could be included in the prenup to have it cover potential future businesses as separate property. This is something you want to consult with a lawyer about while drafting your prenuptial agreement (which should be done at least a few months before the wedding date), not after the fact when you’re already facing a divorce.
Conclusion and Fine Print:
This is all very general information. You will want to talk with a knowledgeable attorney to determine the best course of action for your circumstances. The attorneys at Trolinger Law Offices, LLC not only have experience in domestic relations matters, they have also studied and worked in business law, giving them the knowledge needed to navigate your divorce, while addressing business interests.