Dividing a Business in Divorce – Things You Should Know

When divorce and separation of property occur in the same sentence, it is terrifying. Divorce itself is already tremendous stress, but the matter is aggravated when, during a termination, you still have to divide property, especially when it is your own business. Moreover, your almost-former spouse has the right to a share in the company, even if he or she did not take any part in the creation of the business.

Dealing with the implications of divorce

That is why it is essential to protect your company until it got very far.

Separate and Marital Property in a Divorce

Under the law, when a marriage is dissolving, the spouses must divide the common property. Everything related to the common (marital) property is that the spouses acquired during the marriage life, regardless of who and how much effort was made. For example, a business was created during the marriage; it would still be considered common property, even if the second spouse did not participate in its creation.

New York law also provides separate property; this is all that was acquired by spouses before marriage. Separate property is not subject to division. Besides, any gifts or inheritance received during the marriage are also considered separate property. So, it can be said that if a business was created before the wedding, it could be protected from separation. But, if during the marriage period the second spouse took part in the development of a business, then he or she has the right to get a share in the company upon divorce.

Property Division in a Divorce

When divorcing spouses must share all their common marital property, including assets and debts. Business can also be marital property, mainly if it was founded after marriage. According to OnlineDivorce, a common property must be equitably divided, although not always equal. Separation according to equity means that property will be distributed by what each spouse brought into a marriage. To understand what will be fair, the judge will have to follow the characteristics of marriage and analyze various factors.

Business Division in a Divorce

Distributing a business is not an easy process and involves two main factors.

First of all, experts have to estimate the cost of the whole company, and then the judge has to understand how strongly both spouses are integrated into it. Determining the value of a business is a lengthy and not cheap procedure. Therefore, it is necessary to assume its expediency. If we are talking about a small business where only 1-2 people work, the assessment can be a costly method.

In other words, it takes place only in large companies and only when its cost is genuinely justified.

Other important issues are the duration of the marriage and how much the second spouse is involved in the management of the company. If he or she influences the development of a business and understates any position in the company, then it can be safely said that the separation of business cannot be avoided; you will have to give a part to your ex.

If the spouse is in no way influenced the creation of the company and did not increase its assets, then he or she has less chance to get a share of the business. It is also worth knowing that any increase in the value of the company during the marriage leads to the fact that the spouse has the right to claim a share in the company.

How Can a Court Divide a Company in a Divorce?

A judge comes from a financial assessment of the business and the circumstances of the marriage. Due to the estimation, it is possible to distribute the shares of the parties in numerical terms. Thus, the court may decide that a particular share of the company will come to the ownership of the second spouse, as a result of which the exes will become co-owners.

The other likely outcome of the event is that the business will remain in the hands of one spouse, but a husband or wife will receive more of the marital property as compensation for a share in the company.

Another possible option, but the least popular, is that the court may offer the spouses to sell the business and divide the profits. But since this entails various tax consequences, the courts resort to this decision exceptionally rarely.

Divorcing small business owners

Business Valuation

As mentioned before, business valuation is an essential component of its division. Any assets, debentures, as well as financial statements (not less than for the entire last year), participate in the assessment. In this case, to calculate the value of the business, three models are used:

  • Asset Valuation. A relatively simple way in which all liabilities are deducted from assets. The amount received will be considered the real value of the company.
  • Market Valuation. In this way, the company is compared with a similar company that was recently sold.
  • Valuation according to income. Perhaps this is the most common approach. It predicts the future profit of the company and its financial flows based on all relevant financial documents and special formulas.

How to Protect a Business From Separation

Divorce of two people can generally hurt the business of one of them. Protecting your company is a series of essential steps that you should take care of in advance, long before the divorce knocked on the door. Measures that may help:

  • Prenuptial Agreement. This is one of the most common ways to take care of the fate of your business. Prenup regulates the relations of the parties in case of divorce, as well as the division of property. For the document to be valid, it must be carefully prepared and signed long before the marriage ceremony.
  • Postnuptial agreement. It is signed after the wedding took place and also regulates the ownership interests of the partners. Although there are situations in which the judge has the right to ignore the postnup, it still makes sense to draw up this document if you have not managed to sign a prenup.
  • Isolate your spouse from running your business. The less he or she will be taking part in the life of the company, the less chance he or she will have to get a share of the business.
  • Partnership or Buy-Sell Agreements. Any agreements can also regulate the ownership of a company in the event of divorce or even the death of a spouse.

Divorce can have a devastating effect on a business. If there are documents that protect property rights and regulate the relations of the parties during a divorce, the spouse may not receive anything at all. However, if it’s not possible to avoid marriage dissolution, take care of a good lawyer who will protect your interests before the court.

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