Divorce when you co-own a business raises unique questions and concerns. If you are getting divorced and jointly-own a business, here’s what you need to know.
According to the Pew Research Center, approximately 10% of small businesses in the U.S. are co-owned by married couples. Another 11% of small businesses are jointly owned but managed by only one spouse in the marriage. 27% of all businesses operating in the U.S. are considered family-owned businesses.
If you’re getting divorced and you co-own a business with your spouse, you might find yourself facing unique challenges. Jointly owned businesses might be considered marital property and subject to equitable division in divorce. Even separately operated businesses might be subject to equitable division if the business is considered marital property under the law. And sometimes, a spouse may still have a claim on the marital profits or appreciated value of a separately owned business.
The good news is that no matter how your business is owned or classified under Washington state property laws, couples who are going through divorce have several options.
But first, your divorce lawyer will need to determine whether the business is considered marital property or separate property. Sometimes disputes arise in the process. For example, a spouse whose name isn’t attached to the business and who wasn’t involved in business operations might still sometimes be able to claim joint ownership of the business, or claim the business as marital property, especially if marital funds were used to fund the business, or if shared resources supported the business or its growth.
If your co-owned business is marital property, you and your spouse will have to make critical decisions about what to do with your business.
And if your spouse might have a claim on the profits or appreciation of a separately owned business, you might find yourself facing tough decisions when it comes to settling your divorce. The process will often involve hiring professionals to perform a business valuation or business appraisal, followed by discussions with your divorce attorneys, your business lawyers, financial advisors, and others to determine what your next steps should be.
Due to the complexity of family law, business law, and the finances often involved when a couples co-own a business, many couples seek the professional assistance of family lawyers, business lawyers, and financial professionals. Business appraisers or valuation professionals might also be involved.
This kind of complex divorce lends itself well to the collaborative divorce process, a team-based approach to divorce and settlement negotiations. With the collaborative divorce process, each party is represented by their own divorce attorney. The couple may also include a financial neutral on the divorce team to help the couple divide assets and liabilities. With collaborative divorce, open communication and negotiations allow professionals and the couple to work together to find a solution that preserves everyone’s wealth and investment, one that protects the future of the business. Because collaborative divorce is a private process, business owners have the added benefit of protecting their brand integrity, their reputations, and their investors.
In this Truce Law article, we’ll explore some of the complex questions that can arise when a divorcing couple co-owns a business and explore how our Washington state divorce lawyers can help you and your spouse reach an amicable, out-of-court resolution. We’ll also explore how Truce Law can help you take an amicable approach to your divorce, even if you face a contested divorce because of a co-owned business.
Let’s delve into some of the more important topics that come up when divorcing couples co-own a business.
- Is Your Business Shared (Marital) or Separate Property?
- What if My Spouse Owns and Runs a Business and We’re Getting Divorced?
- Options for Handling a Business in Divorce
- The Importance of Business Appraisal and Valuation
- Protecting a Business You Own
- Why Choose Collaborative Divorce When You Jointly Own a Business?
- Next Steps
Is Your Business Shared (Marital) or Separate Property?
If both you and your partner started the business together during your marriage, then the business is likely shared marital property. In this case, divorce when you co-own a business will be one of your divorce concerns. This means that business profits might be considered marital assets and subject to equitable division during divorce. A business might also be considered shared property if marital funds were used to start a business, if both partners are responsible for business debts, if business finances were commingled with marital finances, or if there’s no clear prenuptial or postnuptial agreement regarding a business started during the marriage.
If you and your spouse co-own a business and want to explore your options, read on to the section in this article about “Options for Handling a Business in Divorce.”
Yet, if you are planning to file for divorce and believe you own a business on your own, your divorce lawyer will help you determine if your business is considered shared marital property or separate property under the law, and help you take steps, if possible, to protect your separate business interests. If you took careful steps to protect your business interests from the start, through a carefully worded prenuptial or postnuptial agreement that specified that the business as well as profits are to be considered separate property, then your business and any growth during your marriage will likely be considered separate property during your divorce.
Yet things can get complicated, even with a prenup.
A prenuptial agreement or postnuptial agreement is strongest when it is further supported by additional steps to ensure the business is separate property. These steps can include careful corporate or business structuring, keeping business assets separate from marital assets, paying yourself a salary, and taking steps to ensure that your spouse doesn’t actively contribute to the business (either financially or by working for the business).
What if My Spouse Owns and Runs a Business and We’re Getting Divorced?
If you’re getting divorced and your spouse owns and runs a business, you might want to speak to your divorce lawyer about your rights regarding any business your spouse launched during your marriage. You might also want to speak to your divorce lawyer if you suspect that a business that your spouse started grew in value during your marriage. Business appreciation may be considered marital property, and if the business was launched during your marriage, you might have more rights than you think (even if the business is only in your partner’s name), and especially if marital funds were used to support the business, or if your labor, input, or skills were used to support the business.
If you’re getting divorced and there’s a business involved, you’ll want to speak to your divorce lawyer to begin the process of determining whether the business is shared marital property, or your own separate property.
Your divorce lawyer might find a range of possible scenarios. For example:
- The business might be considered separate property with the owner spouse retaining control of the business and profits.
- The business might be considered separate property, but the marital spouse might be entitled to a share of business growth and profits during the marriage.
- Or, the business might be shared marital property, and both parties may be considered owners, and entitled to an equitable division of the business value.
Business division can be a complex topic in family law. If you or your spouse owns a business or if you jointly own a business, you’ll want to speak to a divorce lawyer to explore your rights and next steps. The Washington state divorce lawyers at Truce Law can help you and your spouse negotiate a business settlement in your divorce without going to court. We can also help you find a peaceful path forward if you find yourself facing a contested court case over a jointly owned business.
Options for Handling a Business in Divorce
There are several options for dividing a business in your divorce. Here are some common ones:
- Continued Co-Ownership. If you and your spouse get along, or have an amicable relationship, continued co-ownership allows you to maintain co-ownership of your business, share profits, and move forward without business disruption. This can often be achieved through the creation of a new, formal operating agreement.
- One Spouse Buys the Other Spouse’s Share of the Business. This option results in one spouse owning the business outright by paying their former partner for their share in the business. Sometimes the couple or spouse has sufficient cash on hand to buy out their partner’s interest, but sometimes the settlement can involve the negotiation of other marital assets, like a shared home, shared properties, investments, or retirement accounts, if these assets are comparable in value to the value of the spouse’s share of the business. The spouse who keeps the business can also offer their spouse a structured payout, where the former spouse receives payment for their share of the business over time. Having an accurate appraisal of the value of the business is essential.
- Business Sale. Another option is for the couple to sell the business and split the proceeds.
Deciding how to proceed when you co-own a business with your spouse can get complicated. Having a clear understanding of the value of your business, cashflow, and future profitability predictions can help your legal team and your financial advisor help you make the most informed decision about how to handle a co-owned business.
The Importance of Business Appraisal and Valuation
If your business is considered marital property and subject to division in your divorce, proper business valuation or appraisal may be important. There are different ways a business valuation professional can estimate the value of a shared business, so it is important that you understand the method or methods being used, ensure that it’s the appropriate method for your business, and ensure that the methodology of valuation isn’t being used to present a lower or higher estimated business value for the purposes of one spouse having a divorce negotiation advantage.
For example, a business appraisal will look at the value of equipment and inventory if the plan is for the couple to liquidate a struggling business.
Other business valuation methods can produce different results.
Market-based methods estimate the value of your business by comparing your business to other similar companies. Income-based methods evaluate current cash flow to project future cash flow and earnings. Asset-based methods appraise business assets, subtracting assets from liabilities.
Yet some of these methods have limitations. Market-based methods may not account for a growing or shrinking industry, meaning the business can end up being valued lower or higher than it is worth. It can sometimes be difficult to find companies that are directly comparable, which can also lead to inflated or lower estimated values. Income-based methods must be performed meticulously, or errors and distortions in earnings can occur. Historical earnings might not always match future projections, especially if there are looming costs or unmentioned big deals and contracts that company insiders are aware of but are unknown to the business valuation professional. Asset-based methods might be limited or fail to consider the value of intangible assets, like branding or intellectual property.
It’s important to be aware of the potential pitfalls of each method and to consider seeking different opinions if something feels “off.”
Why is this important?
There are many ways to divide and manage a co-owned business in divorce. The estimated value of your co-owned business can have an impact on your divorce settlement and how your assets and property get divided.
Protecting a Business You Own
Everything we’ve discussed so far involves couples facing divorce. But what if you’re getting married and want to protect a business you’ve owned and operated prior to getting married? What if you are already married and are thinking of starting your own business?
If you intend to remain the sole owner of a business you own and are getting married, there are steps you might want to take to protect your business, your co-owners, and investors.
A prenuptial or postnuptial agreement can protect your business. If you started your business before you were married and don’t want your business to be considered marital property, a prenuptial agreement can clarify that your business is separate property. And if you are married and plan to start a business, but want clarity about business ownership, a postnuptial agreement can help.
There might be added complexities in claiming sole ownership of a business you start after you are married. For example, a postnuptial agreement lawyer will likely ask you whether you used separate funds or marital funds to start the business. Your attorney might also ask about whether loans were used to fund the business and how these loans will be structured and paid.
Proper business formation can protect your business from being claimed by a non-owner spouse. Carefully structured shareholder agreements can also protect your business if it is owned by other investors and interests. While corporate structures, shareholder agreements, and business formation is outside the scope of this article, one of the best ways you can protect your business is to consult with a business lawyer about structures that can offer added protection. Other actions, like paying yourself a salary, and keeping business accounts separate from your personal accounts can also offer an added layer of protection.
Some individuals use trusts to protect business assets from being considered marital property, especially when individuals have children from a prior marriage and they want to ensure that their children own and inherit the business. This strategy can work in the context of a larger estate plan.
The key takeaway is this. If you own a business and plan to get married, it’s a good idea to speak to your business lawyer, estate planning lawyer, and family lawyer first to ensure that you have the structures in place to protect business interests, assets, and investors.
And if you are planning to start a business while you are married, you might want to speak to your business lawyer about the best way to structure your business to protect your assets and investors. Your family lawyer can also walk you through the process of putting together a postnuptial agreement and ask crucial questions about tracing funds to ensure that the business is funded using separate accounts and not marital funds, if your intention is to keep your business separate. It’s also a good idea to talk to your spouse, so that you are both on the same page. A postnuptial agreement will require buy-in from your spouse, but it can further clarify business ownership and responsibility.
And if you and your spouse plan to co-own a business, it’s still a good idea to speak to a postnuptial agreement lawyer so that you have clarity about what would happen to the shared business if you were ever to get divorced, or if one partner were to pass away.
Why Choose Collaborative Divorce When You Jointly Own a Business?
Collaborative divorce offers couples who own a business the benefit of privacy.
If you own a business, you have worked hard to develop your brand and public image. Your business or brand may be well-recognized in the community. If your name is associated with your business, protecting your name is paramount.
Traditional divorce, with its public filings, can expose your name, your reputation, and your brand to unwanted public scrutiny. If, during the divorce discovery process, private personal information gets revealed by your spouse, your name, your brand, and your company could face reputational damage and harm. In traditional litigation, there’s no control over what your spouse’s lawyer might write or say in court filings, and sometimes these statements can be damaging.
Because of these risks, more couples are choosing to settle their divorce outside of court, using a private process, like collaborative divorce. Collaborative divorce offers clients a highly supported team-based approach to divorce. With collaborative divorce, each spouse is represented by their own divorce attorney.
Negotiations and the discovery process take place privately, allowing both parties to discuss sensitive issues without anything going on the public record. When couples file for traditional divorce, everything submitted to the court in the form of discovery, or motions and countermotions can end up on the public record.
With collaborative divorce, both parties sign an agreement to settle their divorce outside of court. The couple’s divorce attorneys work with their clients and with each other to help the couple negotiate a settlement that works. For complex cases, like those involving divorce when one or both spouses own a business, other professionals will often join the collaborative divorce team or advise clients. These professionals might include financial advisors as well as outside professionals like appraisers or business valuation professionals.
The collaborative divorce process is focused on finding solutions that reduce damage to all parties involved, including children, and others in the community. If your business has investors, or if outside parties have a stake in your business, taking steps to prevent reputational damage to your business or brand might be something important to consider. The privacy afforded by collaborative divorce, offers you and your business that peace of mind.
Next Steps
If you’re getting divorced when you co-own a business, or if one or both spouses own a business, you’ll want to consider speaking with a divorce lawyer before you file for divorce. If your spouse has filed for divorce, the sooner you speak to an attorney, the better.
The collaborative divorce attorneys at Truce Law are here to help you, whether you choose a collaborative way forward, or find yourself facing tough litigation or a contested divorce surrounding your business. Reach out to the Washington state divorce lawyers at Truce Law for a free discovery call today to learn about the next steps.