Are you and your spouse getting ready to file for a divorce? Here's what you need to know about how a business is treated in a divorce.
At the end of a marriage, the lawyers come in. They meet to divide assets and legally detach you from your former spouse.
These legal negotiations can be simple or complicated depending on the assets you and your partner share or have separately. Unless you have a prenup or signed documented agreement to protect your business preemptively, a shared business can also be up for grabs during divorce negotiations.
Keep reading to learn more about how your business can be affected by divorce.
Know Your Options For Family Property
As a couple goes through divorce proceedings, their assets and liabilities will be split with the goal of equitable distribution. During this process, the court is going to decide whether assets are Family Assets or excluded.
The definition of tangible property and what qualifies as a Family Asset can vary depending on your specific situation. In most cases, your business is considered family property.
It’s difficult for a court to discern how much a business is worth exactly, so often a business valuation is required.
Couples can consider various methods to distribute business interests.
Buy-Out
The most common method is for one spouse to buy out the interest of the other in the business. After a business valuation, the formerly married couple can agree on what half of the value would be.
During this scenario, one spouse would be purchasing the other half of the business from their former spouse. This is only effective when a spouse is able to finance the buy out half of the business.
Co-Ownership
A more cordial way of handling it is to continue jointly owning the business after a divorce. This only works in cases where there’s no ill will between the couple and there is a clause describing the terms of a potential future equal split of the busines.
Another version of this could be where one partner remains in a managerial role and the other takes a step back from the day-to-day operations. In this scenario each partner would own 50% of the business and continue to profit from it.
A Butterfly Transaction
This is an cccounting process used in high value business situations which would incur high taxes on transitioning or liquidating a business asset, where dividend paying shares are issued to the other spouses personal corporation/business. An accounting firm would be required on both sides of the transaction to ensure it is done correctly.
Sell the Private Business
A less common solution is to sell the business entirely and split the profits. Although with selling a business there could be significant taxation issues and you may not be able to get the price you believe that it is worth.
Handle Your Business in a Divorce Settlement
These ways are all options to bring to the table in a divorce negotiation to seek out an equitable distribution of a business owned during a marriage.
Connect with us to learn more about how you can navigate the divorce process.