If you’re like many people, owning your own business is the dream. Being your own boss, answering only to yourself, and being in a position to contribute to your community as an employer and merchant is an understandable and admirable goal, and reaching it takes perseverance and dedication. If you’ve reached this goal yourself, you should be proud of your accomplishment. But if you’re contemplating a divorce, you may be wondering what happens to that business that you’ve worked so hard to build in the divorce process. Take a look at some of the things that you should know about what happens to businesses in divorces.
Is it Separate or Marital Property?
The first thing to consider is whether or not your business is considered separate property belonging only to you, or marital property belonging to you and your spouse together. Something can be considered separate property if it’s something that you owned prior to the marriage, something you inherited alone (in other words, not an inheritance that was left jointly to you and your spouse), or a gift that was given to you alone.
So, a business that you started before you met your spouse or inherited from your parents would be considered separate property – as long as you haven’t done anything that would cause its separate property status to change during the marriage. The problem is that, especially when it comes to small, family-owned businesses, it’s very easy for a separate business to become marital property over time, and you don’t have to put the business in your spouse’s name for that to happen. If you’ve been saving money on accountants for years by having your spouse do the businesses books or if you depended on your spouse’s handyman skills every time something at your office or store needed to be fixed, renovated, or upgraded, your spouse may be able to argue that they also have a stake in the business and are owed their share.
And of course, if you acquired the business during the marriage, invested marital funds into the business, used your joint income to apply for a business loan, or if you and your spouse both worked the business together up until the time you decided to divorce, it’s definitely not a separate property – it’s marital property and will have to be divided in some way.
There are things you can do during a marriage that may protect your business. You can take the steps needed to ensure that your business stays separate from your marriage at all times. You could ask your spouse to enter into a post-nuptial agreement that specifies that you’ll get to keep your business in the event of a divorce (although it’s important to note that post-nuptial agreements are much more likely to be invalidated or thrown out than prenuptial agreements) you can put the business into a trust, or you can have a lawyer draft a buy-sell agreement, which would also protect your business in the event of your or your spouse’s death. If you’re a married business owner who isn’t already considering divorce, these are options you should look into.
But if you’re a married business owner who is already on the brink of divorce or has already started divorce proceedings, then you may simply have to make do with the situation as it is. If you haven’t protected your business or ensured that it’s separate from marital property, then you have a few options:
- Sell the business and split the money with your ex. This is probably not what you want, but you should know that sometimes, that’s what it comes down to.
- Use your share of other assets to buy your spouse out of their share of the business. If you have cash, stocks, and bonds, real estate, or other assets, you can simply give your spouse the value of whatever portion of the business they would be entitled to in those assets instead. If you’re liquid enough, this is often the easiest option for everybody involved.
- Give your spouse a property settlement note. A property settlement note is essentially an agreement to pay your spouse what you owe them for their share of the business over time. This could be a good option for you, especially if you’re not particularly liquid currently, but you expect to be in the future. It may not be such a good option for your spouse, particularly if they’re not getting much out of the divorce settlement other than their share of the business.
- Continue to own the business jointly. This might not be what you or your spouse wants, but it does occasionally happen that a couple decides to continue on as business partners even after ending the marriage. This could be a temporary solution – perhaps the couple expects to be able to sell the business for a profit after a certain date or event and they agree to simply keep running it jointly until that time, and then sell and split the money. Or it could be a more permanent solution, as in a situation where both people love the business and don’t want to leave it or see it sold. It’s unusual and unlikely to work for most divorcing couples, but it is an option.
Divorces are full of difficult decisions, and deciding how to handle a business that was built during the marriage is one of the harder ones. It’s a good idea to research your legal position, and if you determine that your business is marital property that will be subject to division in the divorce, work on offering your spouse a fair settlement in exchange for them giving up their interest in the business. You’ll have more flexibility if you and your spouse can work out a settlement between the two of you than if you have to let a judge do it. A legal resource group like National Family Solutions can help you learn about your options and make the best decisions for the position that you’re in.