Written by Jonathan Breeden
If you own or are a partner in a business and are headed for a divorce, you need to speak with a North Carolina divorce attorney right away. It is unlikely that a divorce will require you to close down or give up your business ownership. However, if your spouse has any interest in the business, your divorce may be contentious and expensive. As a business owner, you should work with an experienced and trusted divorce attorney to fully understand what you need to know about divorce as a business owner. At Breeden Law Office, attorney Jonathan Breeden is ready to handle your complex divorce and protect your rights and business interests.
Call today at (919) 661-4970.
An initial issue that must be resolved during your divorce is whether or not your business is part of the marital estate. If your business is entirely your own property, then your spouse is unlikely to have any claim on it. However, if your business began as or became marital property, then your spouse may seek compensation for their stake in the business.
If you and your spouse formed a business together during your marriage, you are its joint owners. That means your business may be considered marital property, based on North Carolina General Statute (GS) §50-20(b)(1). The greater the amount of marital funds used to form and advance the business, or the more your spouse participated in or supported its growth, the more likely it is to be shared property.
If you started your business prior to your marriage, GS §50-20(b)(2) supports the position that the business is your property alone. By demonstrating you did not use marital funds on your business and your spouse did not contribute to it in any way during your marriage, you may be able to keep it separate from your marital estate. This issue requires looking at the date of business formation, the date you entered into marriage, the origin of any funds use for the venture, and the positions you and your spouse held within the business.
A typical grey area during a divorce is when you formed your business prior to your marriage, and your spouse helped the business grow during your marriage. In this situation, the entire business may not be part of the marital estate. Instead, the value of the business your spouse contributed to may be shared.
When all or some of your business is marital property and your spouse is asking for their portion of it, you must address this when negotiating a property settlement, or you must ask the court to determine a fair property division. Under GS §50-20(a) and §50-20(c), a court must provide for the equitable distribution of all marital property. This does not mean the judge will divide all of your assets 50/50. Instead, they will divide your property and monetary assets in a way that is most fair based on the circumstances.
If you and your spouse negotiate a property settlement, you can decide how to handle their interest in the business. This could include them retaining an ownership interest, or the more likely scenario – you pay them for their stake. If the matter goes to the judge, it is likely they will order your spouse be compensated for their ownership interest. It is not common for a judge to require divorcing individuals to continue to co-own a business together, unless that is what you both want.
When a business is shared property, it needs to be valued. After the issue of whether the business is marital property, this is the second issue that is likely to be discussed. If you are in the position of having to compensate your spouse for a portion of the business, you will want the business to be valued low. Your spouse is in the opposite position, and will want the business to be valued as high as possible.
Valuing a business in any context is difficult. There are numerous valuation methods available, some of which will be more appropriate than others. When you need to value your business during a divorce, you must to work with an attorney and financial professionals who have experience with complex divorce cases. You and your spouse may come to an agreement on the value of the business, or you may each submit valuations to the judge who will make the final determination.
You and your spouse should hire your own appraiser to provide a fair evaluation of the value of your business. Then the judge can decide if the value really is fair. Once a value has been agreed upon for the business, it is added to the pool of other marital assets, ready to be divided.
Once the business has a value, there are three options for what can happen in a divorce.
In this scenario, both you and your spouse would continue on as co-owners of the business. This is a challenging approach because you will need to continue to work together and trust each other.
It may be simpler if you agree one spouse will be the managing partner and make the day-to-day decisions.
In this situation, the business is sold. The purchase price could be divided equally among the two spouses. It could also be divided in another way, as part of the larger property settlement.
For example, one spouse might keep the home valued at $250,000. The sale price of $750,000 for the business might be divided so that one spouse gets $500,000 and the spouse who kept the home gets $250,000. In this way, they each walk away with roughly the same $500,000 in assets.
However, it can be difficult to agree to sell a business if it is one spouse’s dream and primary employment plan. It can be challenging to find a buyer in a timely way in some industries so it can take a long time to sell the business.
This is the most common scenario that occurs in divorce when the spouses own a business. Keep in mind that the term “buy out” doesn’t necessarily mean you have to come up with the cash to hand over to the other spouse in exchange for their ownership interest.
The marital assets can be divided in the same way as described above. One spouse could be granted the home, a vacation home, investments, or retirement assets equal to half the value of the business while the other spouse keeps the business.
If it is determined that all or a portion of your business is marital property, your spouse has the right to make a claim on the business. This may be your worst nightmare, particularly if the business has been your passion over the years, and not your spouse’s. You do not have to let this issue guide you into a contentious divorce. Instead, handle this dispute with the help of an experienced divorce attorney at Breeden Law Office.
Attorney Jonathan Breeden will help you address the issue while attempting to minimize the consequences the divorce has on your business. Call him today at (919) 661-4970, or reach out online to schedule a consultation.