For many business owners, their company is like a baby they have nurtured. They put their heart and soul into its success. It’s a natural reaction to worry about the company’s future if the owner is getting a divorce.
How much claim your soon-to-be ex has on your business depends on multiple factors and both parties’ willingness to compromise. Business owners going through a divorce have multiple strategies to retain their company.
Determining Whether a Business Is Marital Property
Early in the divorce process, both parties outline assets and categorize them as marital or separate property. Generally speaking, property and other valuables acquired before the marriage is separate property belonging to the spouse who originally owned them. Assets accumulated after marriage are considered marital property belonging to both spouses. Marital assets are what is generally divisible in an equitable distribution state like New Jersey.
The process of categorizing and dividing property appears easy in theory, but the practical application can be complex and the target of ferocious debate.
Some general guidelines to consider when classifying your business include the following:
- If you owned the business prior to the marriage, your spouse generally has a claim only on the value that increased during the marriage.
- If you started the company after the marriage, the business is typically considered marital property subject to division.
- If you and your spouse were equal owners in the business, you both have a similar right to it.
Many other elements factor into a spouse’s portion of the business. Considerations include how much they sacrificed for the company and if they provided time or expertise to business operations.
Valuating a Business
Equitable division cannot be completed without understanding the value of the asset. Getting an accurate valuation of the business is an essential component. Both parties often have professional valuators analyze the business by looking at profit-and-loss statements, tangible and intangible assets, debts and liabilities, contracts, inventory, and more. Potential future earnings are also calculated.
More Than One Way to Split a Business
Spouses can receive their share in the business while keeping the company intact. Divorce agreements can creatively meet the needs of both parties.
For example, in lieu of their portion in the company, the spouse accepts ownership of the marital home. Some business owners choose to finance the spouse’s claim on the business through monthly or lump-sum spousal support payments. Amicable divorcing couples sometimes choose to continue working together as co-owners.
Other spouses decide the best course of action is to sell the business to a third party and split the proceeds.
No matter how the business is divided, tax implications for both parties must also be considered.
Proactively Protect Businesses from Divorce
We counsel clients who own a business before marriage to draft a prenuptial agreement. Prenuptial agreements can help safeguard the company by taking it off the table should the couple later divorce. If the company is formed after the marriage by only one spouse, a postnuptial agreement can achieve the same goal. These contracts must be fair and can protect the interests of both parties.
Prenups and postnups are contracts that courts typically accept unless they were signed under duress, or a spouse was not truthful about the financial impacts of the document. A judge can also throw out the agreement if they believe it is egregiously unfair.
Ending a Marriage Doesn’t Have to End a Business
Many business owners consider their companies as extensions of themselves. Holding on to the business is a priority in their divorce. At Lane & Lane, LLC, we understand that level of determination. In our 60 years of combined experience, we have helped many divorcing business owners negotiate solutions that meet their obligations while maintaining ownership.
If you are worried about the future of your business in a pending divorce, know that you have options. Schedule a consultation with us by calling (908) 259-6673 or sending an online message.
