Divorce Between Small Business Owners
When a married couple owns a business together and decides to get divorced, the process for dividing a business during divorce is never simple. Indeed, divorce with a business involved is often one of the most intricate types of divorce, especially among high net worth couples who will have to deal with complex property division more generally.
Experienced divorce attorneys know how important it is to protect business from divorce, but it is also essential to understand the ways in which various state divorce laws can affect the division of an LLC or another type of business when it is owned by a couple that is getting divorced. We want to provide you with some background information into property division more generally, and then we will discuss a few different scenarios in which a business might need to be divided as part of a divorce.
Understanding How Marital Property Gets Distributed
There are two different models for property division in a divorce:
● Community property states, where marital property is divided equally or 50-50 between the spouses; and
● Equitable distribution states, where marital property is divided in a way that the court determines to be equitable or fair to both of the parties.
A majority of the states in the U.S. are equitable distribution states, but there are still a handful of community property states that include: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. If you file for divorce (or if your spouse files for divorce) in one of these states, then marital property will divided equally between the two of you.
Now, what do we mean when we refer to marital property? In brief, most states agree that marital property includes both assets and debts from the marriage. Most states have laws that clarify that there is also frequently property that should be classified as “separate property” or “nonmarital property,” and thus is not subject to division. How do you know if property should be classified as marital property or separate property? For example, under North Carolina law, separate property includes all of the following:
● Real and personal property acquired by one of the spouses before the marriage;
● Real and personal property acquired by one of the spouses during the marriage through an inheritance;
● Real and personal property acquired by one of the spouses during the marriage as a gift designated specifically for only that spouse;
● Real and personal property acquired during the marriage in exchange for separate property; and
● Increase in value of real and personal separate property during the marriage.
Gifts and inheritances acquired by one spouse during the marriage typically need to be specifically designated as an inheritance or gift only to that spouse in order to be considered separate property in the event of divorce.
How is Commingled Property Handled in Divorce Cases?
Before we move into specific examples of dividing a business during divorce, we want to discuss the complications of commingled property. In short, when a spouse mixes—or “commingles”—separate property with marital property, it can be difficult to classify that property upon divorce or to determine its value.
The following are some examples of commingled property:
● Spouse A uses savings account created before the marriage to fund the purchase of a retail space for the marital business;
● Spouse B sells stocks purchased prior to the marriage in order to pay for supplies needed to run the marital business;
● Spouse A inherits a business during the marriage and both spouses contribute earnings from a marital checking account to the business; and
● Spouse B starts her own business prior to the marriage, but after getting married both Spouse A and Spouse B contribute marital income and other marital assets toward the business.
There are numerous other ways in which property can be commingled, but the above are just a few examples that might pertain to commingled property when it comes to a business.
Dividing the Business If One Party Inherited the Business
How is a business divided if one spouse inherited it? Whether the spouse inherited the business before the marriage or during it, it would initially have been classified as separate property. Assuming that the spouse ran the business only with separate property, and that no marital assets were used in keeping the business afloat and that the other spouse did not contribute to the business in any way, then the inherited business could remain classified as separate property upon divorce and would not be subject to distribution.
However, this scenario is unlikely. In most cases when one spouse inherits a business that initially would be classified as separate property, both spouses end up contributing to it, and marital assets go toward the business. In this kind of scenario, the court would need to value the business at the time of the divorce, and then it would need to trace out the amount of that total value that should be classified as separate property (and not divided) and the amount of that total value that should be classified as marital property (and should be divided). In cases where it is too difficult to trace out the different property classifications, a court may determine that the whole business is separate property or marital property based on when it was started, the amount of marital property contributed, and so forth.
Dividing the Business If Both Parties Started the Business Together
When a couple starts a business together after the marriage, the division process is much simpler. The court likely will classify the business as marital property and will value the business. Then the court it will “divide” the business along with other marital property.
Can one spouse keep the business after a divorce? The answer to that question may depend upon the business structure.
Distinctions Between a Partnership and an LLC When Dividing a Business
Whether your business is classified as a partnership or a limited liability corporation (LLC) can affect whether you can keep a business after divorce.
There are many similarities and distinctions between partnerships and LLCs, but there is one major difference when it comes to divorce: a partnership cannot continue to operate when one partner is gone (the business structure itself requires all partners to remain partners), while an LLC can remain in operation if one of the owners leaves the business. As such, divorce and LLC ownership means that one of the spouses may be able to keep the business while the other spouse leaves the business as part of the divorce settlement.
Contact a High Net Worth Divorce Attorney
Dividing a business in a divorce can be extremely complex, but a high net worth divorce lawyer can provide you with experienced counsel every step of the way. Contact 1-800-FAMILY-LAW to learn more about our nationwide services.