Don’t Let Your Business End Up in the Wrong Place
If you own a private business, you will do anything to protect it. It’s like your own child.
That’s why business owners who get a divorce work tirelessly to protect their business and ensure it doesn’t go into the wrong hands. What many people don’t realize is that even if you enter a marriage with your own business, meaning it’s considered separate property, that doesn’t mean you will leave your marriage with 100% of your business. This is especially true in cases where a business increases in value due to the non-owning spouse’s contributions.
With this in mind, you may want to consider following certain steps to protect your business during divorce. To get started on the process, you must first identify marital property and separate property. You must consider who owned the business prior to the marriage, how the business was acquired, and the financial contributions and efforts that you and your spouse made to the business during the marriage.
Once you make these determinations, you must value your business. Brace yourself, as this can be a back-and-forth battle between you and your spouse. To make this process a little easier, however, you and your spouse should hire your own financial experts, whether it be an Accredited Senior Appraiser (ASA), a Certified Business Appraiser (CBA), or a Certified Public Accountant (CPA) with an Accredited in Business Valuation (ABV) qualification. To determine the fair market value of your business, you may consider taking one of three approaches:
- Asset approach
- Market approach
- Income approach
Once you and your spouse agree on a business valuation, you must plan for the future of the business. According to the American Bar Association, there are three ways to address your private business interests in divorce.
- Buy out your spouse: A common route people take is purchasing, or “buying out,” their other spouse’s stake in the business. These transactions are generally not treated as a sale for tax purposes, meaning these transfers of property resulting from divorce are usually not subject to income tax. However, if you wait 6 years or longer to buy out your ex-spouse, then a judge may assume that it has nothing to do with the divorce and instead treat it as a sale for tax matter.
Keep in mind that this option only works if there is enough cash or liquid assets to buy out your spouse, so you should talk to an attorney to determine the best method of obtaining your spouse’s interest in the business.
- Sell the business: You may want to sell your business and divide the proceeds if the first option doesn’t work out. If you and your spouse can agree on this option, you must be mindful of the challenges that could arise down the road, such as finding a third-party buyer, operating and managing the business until it’s sold, and selling the business altogether.
- Co-own the business: The thought of running a business with your spouse may sound like a nightmare. If that is the case, this option is probably not right for you. However, if you and your spouse have been amicable, respectful, and cordial throughout your divorce proceeding, this option may work for you. You and your spouse may consider jointly owning the business or even making an agreement where one spouse runs the business, and the other spouse receives a share of the money.
Ultimately, you should speak to an experienced attorney before making any final decisions about how to protect your business in your divorce. The risks run high in these situations, so you need reliable legal counsel to help you make the best possible decision for you and your business. We can provide that and more.
To speak with our Orange County divorce attorney, contact us online or at (845) 605-4330 today!