People may devote years of personal savings and countless hours of effort to establish or grow a business. Whether an entrepreneur starts a small retail shop or opens a professional practice after getting a degree, their business likely requires a lot of effort and ongoing investment.
They may be very proud of the company that they run, and it may be their main source of income. If a business owner divorces, they might worry about what could become of the company or professional practice that they started.
Under community property statutes, spouses typically have to divide any resources that they acquired during their marriage or that they acquired with marital income. Is a business or professional practice subject to division in a divorce?
Not all property is subject to division
Business owners often need to strategize carefully if they want to protect their companies when they divorce. Some people hope to establish that the business is separate property that is not subject to community property rules.
The family courts treat assets owned before marriage or inherited from others as separate property in many cases. However, even if a business was an inheritance or the owner started the company before marriage, it may still be somewhat vulnerable.
Typically, the need to consistently reinvest in the organization results in commingling during marriage. The business-owning spouse must use marital income to maintain the company. In many cases, they may also expect their spouse to invest their income or time in the organization. Unless the spouses kept fully separate financial accounts and signed a marital agreement addressing the business, the chances are good that at least part of its value may be part of the marital estate.
The good news for business owners is that while commingling might make the business vulnerable, there are ways to preserve it during divorce. Ensuring that the valuation for the business is accurate is important. Determining what the company is worth and how much of that value is marital can influence the best way to manage property division proceedings.
Frequently, business owners may want to find ways to settle with their spouses instead of litigating. Particularly in cases involving professional practices, the other spouse may not have any interest in actually owning or helping run the business after the divorce. They may simply want to account for its value when addressing other resources.
If business owners agree to allow their spouses to keep certain assets or if they take responsibility for more marital debts, they can potentially preserve their business. They can reach a property division settlement without sharing its ownership or needing to withdraw equity to compensate their spouses.
People anticipating a complicated divorce process because of valuable property may need help preparing for negotiations or family court proceedings. Identifying high-value resources and setting clear goals can help people navigate an upcoming divorce.