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How Will Divorce Affect My Business? | | High Swarts LLP

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Divorce and business. For owners, running a business can be endless and all-consuming. In many cases, your commitment and passion for it can lead to strains in your personal life that can lead to marriage and divorce. Please consult.

Will I lose my business in a divorce?

If the person facing divorce owns or co-owns a business, the question arises as to whether the divorce will force liquidation of the company. In most cases the simple answer is no.

However, courts will consider evaluating your business marital property as part of their financial analysis in a divorce.

Marital property is all income and property acquired by one of the spouses during the marriage. This includes savings, real estate, stocks, bonds, debt, and business ventures. Marital property also covers compensation arising from business in savings. In addition, the court will fairly divide investment and retirement savings up to the date of separation.

The owner’s spouse’s income determines future child and spousal support.

Note: It can be argued that the non-owner’s spouse will not double-dip in business value based on excess income. For example, if non-owners receive their fair share of the value of extra earnings, they should be removed from the income available for support. A good business divorce attorney should be aware of this potential concern.

What is marital property?

Since business and divorce focuses on marital property and its distribution, let’s take a closer look at what constitutes marital property.

If a business is established during the marriage, it is marital property. That’s true even if your spouse doesn’t own any part of your business. Therefore, your spouse shares ownership and has a claim against your company.

Even if the business is your property, your spouse can make a claim against the increase in value of the company during the marriage. Best to speak with a lawyer.

The following factors come into play when determining whether your business is marital property or personal property.

  • when I started my business
  • Period from founding to marriage
  • business success before and after marriage
  • Spouse’s involvement in business formation
  • Spouse’s contribution to business operations or growth
  • Changes in business evaluation over time

Nine states consider marital property to be community property. As a result, they give each spouse her 50/50 split.

In other states, including Pennsylvania, courts use equitable distribution to determine what each spouse receives. You can learn about it here. Again, a business valuation may be required to support the divorce proceedings.

Four Exceptions to Marital Property

As mentioned earlier, various factors determine marital wealth. However, there are four exceptions to her:

  1. gift, bequest, inheritance

    Gifts, bequests, or inheritances received by one party from a third party are held in separate ownership and are not considered marital assets and are valued upon receipt. However, the increase in value is considered marital property.

  2. property acquired before marriage

    Marital property does not cover assets that were held in separate ownership prior to the marriage. Again, however, the increase in value during marriage is.

  3. Property acquired after separation

    Assets acquired after separation for funds other than the marriage are not marital property.

  4. property protected by a prenuptial agreement

    A well-crafted prenuptial agreement protects all assets acquired before and possibly during the marriage. So please consult your local family lawyer.

A business requires an evaluation after filing for divorce if it is identified as marital property or some marital element. The non-owner’s spouse has the right to know whether it is marketable, whether the business has significant assets, and whether it has succeeded in generating excess income for the owner.

However, in some circumstances, the success of a business can be almost entirely based on the personal goodwill of the owner. As a result, it may be of moderate value to distribute. In most cases, courts want the business to survive the divorce as property of the owner’s spouse, primarily if the family has relied on the company to generate income.

Determining Business Values ​​in Divorce Cases

Divorcing couples often disagree on the value of the company, and the business appraiser will define the standard of value before proceeding with the valuation. Value criteria present a set of hypothetical conditions for determining value.

There are three main approaches to determining that rating:

  1. assets: With this approach, assets minus liabilities are equal. Assets include physical assets such as inventory, equipment, and real estate. Intangible assets include intellectual property, accounts receivable, etc.
  2. market worth: Similar to valuing real estate, appraisers value businesses based on comparable businesses that have been sold.
  3. income: The most common valuation method uses business history and various formulas to predict a business’s cash flow and profits.

It is important to note that these standards can produce significantly different values. If you have a simple business model, it may be easier to determine fair value. But otherwise, you need the services of a business appraiser.

Always consult a business divorce attorney for guidance on what constitutes a particular set of values. They can review past litigation within a jurisdiction to uncover unauthorized proceedings or decisions. And it can benefit you greatly.

Divorce and other considerations for your business

Courts usually try to limit damages to your business. As such, it often responds to the acquisition of a non-owner’s economic interest in a business rather than causing financial hardship for the business owner.

If your spouse works for the company and is not the owner, you need to make sure they do not actively damage the company. For example, if your spouse cheats by calling customers or coming into your office, they may be trying to retaliate against you for personal reasons.

These actions can harm the value of business assets and future income streams. If you employ a spouse and they engage in such conduct, termination is an option.

protect your business from divorce

You may not want to think about it, but 50% of marriages end in divorce. Therefore, in order to survive a divorce, you should take steps to protect your business. We recommend that you consult your local attorney to discuss your options.

You can do the following:

  1. couple agreement

    A contract, whether pre- or post-marriage, allows you to designate your business or future company separately from the marriage. Courts may not honor marital contracts, but they will protect your business in the event of a divorce.

  2. Sales contract

    This contract controls when the owner can sell the interest, who can buy the interest, and the price paid. It works when the owner is retired, bankrupt, disabled, divorced, or dies. In short, a sales contract is a kind of prenuptial agreement.

  3. shareholder agreement

    Shareholder agreements can define guidelines for divorce. For example, you can determine a mechanism for evaluating each spouse’s interest in the company, assign business ownership upon divorce, and restrict ownership transfers.

  4. business structure

    Along with a shareholder agreement, structuring your business as a partnership or limited liability company (LLC) can provide protection against divorce and business.

  5. employment

    Do not allow your spouse to work for you or with you. As a couple, it may seem like a good idea. However, it can cause problems during divorce.

  6. trust

    In a trust, your business does not count as marital property because it owns the business.

Another important safeguard is to remember to pay yourself a salary instead of investing cash flow in a business. can prevent you from doing so.