Divorce can be a stressful and complicated experience for anyone, but it can be particularly painful for business owners.
For many entrepreneurs, the thought of losing a company they've worked hard to build and grow can be overwhelming. Dividing assets, including the business, can cause significant stress and anxiety. The settlement outcome can also greatly impact the owner's future and business.
Current data shows that a staggering 48% of small business owners have been through a divorce, and many of them faced significant issues in protecting their businesses during the process. But despite the challenges, there are steps that business owners can take to safeguard their companies and ensure that they emerge from a divorce with their businesses intact.
So, how do entrepreneurs protect their businesses before or during a divorce? We will explore some of the fundamental strategies that you can use to divorce-proof your businesses.
Is my business marital property?
In a divorce, marital property refers to any assets acquired during the marriage. Whether a business is considered marital property and subject to division in a divorce settlement can depend on several factors.
If a business was started before the marriage, it may be considered separate property and not subject to division. However, if the business increased in value during the marriage, the increase in value may be considered marital property and, therefore, subject to division.
Businesses formed during the marriage are generally considered marital property and subject to division. This is the case even if only one spouse is listed as the owner of the business, as the non-owner spouse may have contributed to the business's success through financial or other means.
The treatment of a business in a divorce can also depend on the ownership structure of the business. For example, if the business is a sole proprietorship or a partnership, its value may be considered marital property. In the case of a partnership, the non-owner spouse could be entitled to a portion of the business's profits.
If the business is a corporation or a limited liability company (LLC), the non-owner spouse may be entitled to a share of the value or profits, depending on the state's laws where the business is located. Determining whether a business is considered marital property in a divorce can be complex, and it's crucial to seek legal advice to protect your business's interests and understand your options.
How are businesses treated in a divorce?
When it comes to business ownership, there are various types of ownership structures available with unique benefits and limitations. Sole proprietorships, partnerships, corporations, and limited liability companies (LLCs) are among the popular choices. Regardless of the type of ownership structure, businesses are generally subject to the same rules when it comes to divorce.
In general, the treatment of businesses in a divorce depends on whether the business is considered marital property. If the business was created or acquired during the marriage, it will typically be considered marital property and subject to division in a divorce settlement. This means that both spouses will have an interest in the business's value and may be entitled to a share of its profits.
If the business was created before the marriage, it may be considered separate property and not subject to division. However, if the business increased in value (regardless of its profitability) during the marriage, the increase in value may be considered marital property and subject to division.
Gradual buyout in divorce
In some cases, spouses may agree to a buyout arrangement, where one spouse buys out the other spouse's interest in the business. This can be a complicated process that requires a detailed valuation of the business and negotiation of the terms of the buyout.
It's important to note that the laws regarding the treatment of businesses in a divorce can vary from state to state. Some states may have laws specifically addressing how businesses should be treated in a divorce, while others may rely on general property division laws.
What does California divorce law say about businesses?
California is a community property state, and assets obtained during the marriage are considered shared property and subject to the division process in a divorce. This includes businesses that were formed or acquired during the marriage or if community funds were used to acquire or maintain the business.
If a business is considered community property, both spouses have an interest in the business and may be entitled to a share of its profits. However, if the business was created before the marriage or after the couple separated, it may be deemed separate property and not subject to division. The exception would be any increase in the value of the business during the marriage, which may be considered community property and subject to division.
When it comes to dividing community property that includes a business, the court may divide it equally between the spouses or allocate the business's value to one spouse in exchange for other assets or payments. However, the court considers various factors when determining how to divide community property, including how long the couple was married, the contributions of each spouse to the business, and the tax consequences of any division.
I started my business before I got married. Who owns it?
If you started your business before marriage, it may be considered separate property and not subject to division during divorce proceedings. However, if you To protect your business from potential division during a divorce, consider getting a postnuptial agreement that specifies how the business should be handled in the event of a divorce. If you plan to remarry, you may also want to consider getting a prenuptial agreement before tying the knot again.
To divorce-proof your business and avoid any confusion or disputes over ownership, it is important to maintain accurate records of its finances and operations and any contributions made by your spouse or yourself during the marriage.
Here are some more tips to protect your business prior to a divorce:
- To protect your business from potential division during a divorce, consider getting a postnuptial agreement that specifies how the business should be handled in the event of a divorce. If you plan to remarry, you may also want to consider getting a prenuptial agreement before tying the knot again.
- Ensure you are keeping your personal and business finances separate by maintaining different bank accounts and credit cards for both personal and business finances. This will assist you in proving that your business is a separate entity and not marital property.
- Document all business-related transactions, such as contracts, invoices, and receipts, to prove the value of your business and its assets.
- Create a succession plan to outline who will take over the business if you are unable to continue running it.
- Consider a buy-sell agreement to protect your business in a divorce, but know its limitations. Note that it's a supplementary document with your business partner, and you would still need a prenup or postnup with your marital partner to keep the business separate. Consult with professionals to ensure it's right for your situation and properly drafted.
Consider placing business assets in a trust for asset protection and tax benefits.
- To ensure that your business is adequately protected, it's essential to seek advice from a lawyer who specializes in business law. This is because the legal requirements for protecting your business are distinct from those of family law.
How does divorce work when you own a business together?
Working with a Divorce Consultant who is a Certified Divorce Financial Analyst® (CDFA®) can be a valuable step in navigating a divorce when you own a business together. A CDFA® can work with you and your attorney to analyze the financial implications of various settlement options and help you make informed decisions about the future of your business.
Here are some actions you can take to navigate this situation:
- Determine the value of the business:
Determining the value of a business is an essential step in dividing business assets during a divorce. Generally, a CDFA® would work alongside CPAs who are accredited in business valuation to ensure that the value of the business is accurately calculated. Keep in mind that due to its high cost, business valuation methods vary depending on the case.
- Decide on the future of the business:
Once the value of the business has been determined, you and your spouse must decide what to do with the business. You may choose to sell the business and divide the proceeds, buy out your spouse's share of the business, or continue running the business together as co-owners. A CDFA® can guide you in evaluating the fiscal impact of these options.
- Negotiate a settlement:
Once the value of the business has been determined, you and your spouse must decide on the future of the business. You may choose to sell the business and divide the proceeds, buy out your spouse's share of the business, or continue running the business together as co-owners. A CDFA® can provide financial expertise to evaluate the financial ramifications of these options, while a business coach can offer support in addressing the personal and professional implications of each choice.
- Create a plan for the future:
Divorcing when you own a business together can be emotionally and financially draining, so it is important to create a plan for the future that takes into account the practicality of working together as ex-spouses. This may involve developing a business plan if you choose to continue running the business together, but it's crucial to determine if this is a realistic option.
Working with a divorce coach can help you restructure your communication patterns with your ex-spouse, making it easier to develop a plan for the future of the business that minimizes conflict. Meanwhile, a CDFA® can collaborate with you and your divorce coach to create a tailored plan that considers your new financial circumstances and goals.
- Maintain good communication:
Effective communication with your ex-spouse is vital when navigating a divorce while co-owning a business. To ensure a successful outcome, carefully consider the process and communication with your ex-spouse. You may need to devise a communication plan if you plan to continue running the business together, which can help manage potential conflicts and maintain a professional relationship.
Remember that your ex-spouse will still play an integral role in the business, making it challenging to separate personal and professional matters, which could lead to complications. To overcome this, it's vital to proactively set boundaries, establish clear lines of communication, and work collaboratively to make decisions that prioritize the interests of the business.
In certain situations, a CDFA® can act as a financial neutral or divorce mediator, facilitating communication and ensuring that both parties understand the financial effects of their decisions. By prioritizing clear communication, respect, and collaboration, you can navigate this complex situation successfully and safeguard your business interests.
Work with a Certified Divorce Financial Analyst®
Protecting a business during a divorce is a complex process that requires strategy and careful consideration of the financial implications. One of the best ways to ensure your business remains intact is to be proactive and consult with a Certified Divorce Financial Analyst® (CDFA®) early on.
Have any questions? Unsure about your next steps? Book a consultation today.