Every divorce is different, and the rules for dividing property vary widely from state to state. There are two main approaches to dividing property—an equitable division or community property approach. The majority of states follow an equitable division approach, where property is divided equitably, but not necessarily equally.
A few states have enacted community property laws, specifically Alaska (where you can opt into a community property system), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under community property rules, judges will generally split marital property equally, although exceptions may apply.
The nature of your business and your spouse’s involvement in its management will impact how it’s divided in your divorce. Marital property is typically divided according to equitable distribution or community property laws. Within those laws, in certain states a judge may also consider each spouse’s income, employment and conduct during the marriage such as adultery or one spouse’s primary role in raising the children.
Separate property isn’t subject to division in a divorce. Only marital property or property owned by both spouses is impacted by equitable division or community property rules. Therefore, how your property is characterized (separate or marital) will determine who can keep the property following a divorce. Generally, a spouse’s separate property includes items owned before the marriage or obtained through gift or inheritance. However, separate property may lose its separate character if it’s mixed with marital or community property.
An integral part of dividing your property is understanding its value and character. A business evaluator can be very helpful to setting a market value on your business, particularly in cases involving complex or high-value businesses. To determine your business’ worth, a business valuator may review your business’ tax returns, assets, debts and the nature of the business to put a price tag on your business in a divorce.
Some couples believe they can perform a fair assessment of their business’ value. It is notoriously difficult to separate yourself from your business and perform an unbiased assessment. A business valuation can assign a reasonable value to your business and ultimately help a judge divide things fairly in your divorce.
A judge will divide your business based on the nature and character of your business and whether it’s separate or marital property. A business that is one spouse’s sole and separate property will be awarded only to that spouse regardless of whether you live in an equitable division or community property state. Things can get murky if your spouse helped manage the business or you used marital funds to grow the business during your marriage.
When marital funds are commingled or mixed with one spouse’s separate property (such as in a business or making mortgage payments on a marital home) those once-separate funds can become marital property. For example, if you invested your spouse’s earnings into your separate business, your spouse may have a claim to your business in a divorce. Separate property mixed with marital property typically loses its separate character and becomes marital property because it becomes so difficult to trace back to its original source. In some circumstances you may be able to trace what assets were put in the business and delineate what percentage of the business is separate versus marital property. Still, tracing assets is a tedious process and there’s no guarantee that a judge will agree with your formulation
Just because you’re divorcing doesn’t mean that you’re obligated to sell the family business. If you’ve managed the business on your own with little help from a spouse, it’s likely that a judge will allow you to continue to handle the business following your divorce. This is particularly true where only one spouse has participated in the day-to-day business affairs and that spouse owned the business prior to marriage. In cases where both spouses put years of hard work into building the business, dividing it will be more difficult.
A premarital or postnuptial agreement may protect your business in a divorce. A lot will depend on how well your agreement is drafted and whether your state recognizes pre or postnuptial agreements. In cases where your spouse has played a big role in your business, it will be difficult to argue that your spouse isn’t entitled to a share of the business you built together. In those cases, one spouse may essentially buy-out the other spouse with a long-term payout or by requesting that the other spouse receive a larger share of the marital estate in a divorce.
Sorting out business ownership and management rights can be very difficult. Keep in mind that a divorce won’t automatically dissolve the business you’ve poured your life into. If you have additional questions about the impact of divorce on your family business, contact a local family law attorney for advice.