January 8, 2021

According to the American Psychological Association, about 40 to 50 percent of married couple in the United States divorce. The divorce rate for subsequent marriages is even higher1. What does this mean for you if you own a business?

This is one of the most challenging issues you will have to face during a divorce. While every situation is going to be different, here is an overview of what you can expect to happen:

First, you will need to determine if the business interest is considered separate property or a marital asset. This will vary from state to state, but in general, separate property is any property that was acquired before marriage, an inheritance or gift received by one spouse solely.

Separate property can lose its status if it is mixed or comingled with marital property. Marital asset refers to all property acquired during the marriage, regardless of ownership or who holds the title to it.

The definition for marital property will also differ from state to state. Even if the business was started prior to the marriage, any increase in value of the business during the marriage is considered marital property.

Next, you will need to figure out what the business is worth. The business valuation is often a major source of disagreement in a divorce. In most cases where a business has significant value, you will want to complete a formal business valuation.

Completing a business valuation with an independent qualified valuation professional can be costly and time consuming. In many cases, each spouse will hire his or her own valuation specialist.

Another option for divorcing spouses who are cooperative can simply agree to a business value or assign no value at all to a business.

Lastly, after the business has been valued, the spouses need to figure out what is going to happen to the business after the divorce. The most common options include: (a) one spouse buying out the other spouse; (b) selling the business and splitting the proceeds; or (c) remaining co-owners.

It is important for each spouse to address the pros and cons of all the options for dividing a business with his or her attorney, tax advisor, wealth manager, and other advisors before agreeing to and implementing any specific strategy.

Disclaimer: This article is for information purposes only. The author is not an attorney and nothing contained in this article should be considered legal advice. Readers are advised to consult with their legal advisors before attempting to utilize any of the information in this article.

1 https://www.apa.org/topics/divorce