Knowing how to divide the assets of a joint business venture when you divorce, can be challenging. It is important to look at the situation from all angles to determine what will be most beneficial for the business and all parties involved. Keep reading to find out what our readers recommend you consider before dividing your business.
Present and Future Value of Business Assets
Initially, divorcing couples will focus on the value of the business asset to be split. There are two primary factors to consider when looking at value.
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- ● The present value of the business asset(s)
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- ● The future value of the business asset(s)
- ● A third factor is a degree to which both spouses’ contributions are impacting the value of the asset(s).
Clearly, it is cleaner and easier to reach a settlement on an asset where only one of the spouses is actively involved.
An example of a hard-to-divide asset that is intrinsically associated with the family unit would be a family restaurant that has been jointly run for years. Dividing “Ma and Pa’s” diner without Ma or Pa is difficult, and the absence of one of the spouses could clearly impact the future value and sustainability of the asset.
The financial value of the asset(s) tends to attract most of the attention when a couple is divorcing. A factor that often does not get ample consideration during divorce is the emotional impact. A great example of this is a couple that jointly owns a 25-unit apartment building.
If the divorce is occurring during a down cycle in real estate, it might not be optimal, from a valuation standpoint, to sell the apartment and divide the proceeds. Therefore, from only a financial perspective, the optimal course of action might be to hold onto the apartment building and sell at a time in the future when maximum value can be realized.
However, if one of the separating spouses is seeking a greater degree of separation for his or her mental health, this could come in conflict with the value maximization sought when selling the asset. There is no simple answer to this dilemma, as the type of assets and level of joint efforts in maintaining the asset can vary substantially from asset to asset.
The best advice here is to raise this awareness, and for the pending divorcee to try to identify the mental health impact or goals around post-divorce connectivity tied to business assets. If this is a concern, sit with both an attorney and ideally a therapist and seek to map out a strategy specific to the joint business asset that takes into consideration both the mental health of the divorcee (if holding onto the asset for a period of time post-divorce) as well as the mutually beneficial goal of maximizing the value of the shared business asset.
Determine Who is Legally Responsible for the Business
The first, and probably most important step, in the division of business assets is to determine who owns the business. I have seen a business under the wife’s name and employer identification number (EIN, i.e., business tax ID) but run by the husband. In the divorce, he took the business, but all the tax documents were in her EIN. An EIN provided to a sole proprietor is tied to the owner’s Social Security number. The husband got the business, never changed the EIN, and never paid estimated taxes. The wife is responsible for all the taxes because the income was under her EIN. The husband had issues with not changing the EIN. It was a horrible mess.
Again, first, who is legally responsible? Who’s EIN? Who is listed on the state documents if the business is a corporation or LLC? If both spouses are in the business, then it is a partnership. If the whole business goes to one spouse, then the partnership dissolves and it becomes a sole proprietorship.
Once you know the legally responsible person, then ask who runs the business and what contributions the other spouse makes. Sometimes one is the “worker” while the other is the bookkeeper and office manager. For licensed professions like plumbers, electricians, etc., the license holder is the only one that can do the job.
If the business will be continuing, then the license holder or worker should get the assets so the business can continue. If the owner is not the worker, then the business needs to close and the assets transferred to a new business opened by the worker.
Every situation is different and decisions need to be made based on ownership, participation in the business, desire to continue the business, and allocation of other marital assets.
Baron Christopher Hanson
Baron Christopher Hanson, Commercial & Residential Real Estate Consultant at Coldwell Banker Realty.
Your Location Matters
Depending on what state the divorcing couple resides in, a judge may require the liquidation of business assets, commercial real estate, equipment, and even residential real estate to split any proceeds according to the divorce decree, especially if such assets were acquired or formed or created during the marriage.
In many cases, married couples will use their residential home as collateral to finance their business, which may include the marital home if it’s included in any business finance capacity.
Thankfully here in Florida judges may grant the entire business or home or asset to one spouse whilst requiring the other spouse to buy out each asset accordingly and not interrupt the operation of the business. What this means is that you will need to have your business appraised immediately in case you need to place it on the market or buy one another out.
Most states consider all assets acquired or formed during the marriage as joint or marital assets. If the business was an asset created or formed during the marriage, the business may be subject to equitable distribution, and in most cases, a forced buyout.
9 Factors to Consider in Dividing Business Assets in a Divorce
When handling the division of business assets in a divorce, you should consider:
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- ● Whether the property was acquired before or during the marriage.
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- ● The debt incurred, the contribution made to the upkeep of the assets, the assets’ classification as marital property, the patent, trademarks, and vehicles.
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- ● Who has more custody of the kids?
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- ● How much does one partner earn in comparison to the other?
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- ● The standard of living needs to be maintained by each [person].
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- ● If one has a job or can work or not.
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- ● If one partner solely runs the business in question.
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- ● Whether a prenup or postnup was signed.
- ● If selling off the company would be fair for all parties involved.
Splitting business assets during a divorce differs from state to state, so the state where you’re having the divorce would determine the rules of splitting the business assets.
Inez Stanway
Inez Stanway, CEO of Live Laugh Create.
4 Important Factors to Consider
There are a number of factors to consider when handling the division of business assets in a divorce. First, it is important to determine the value of the business. This can be done through a professional appraisal or by using a combination of income, cash flow, and market methods.
Once the value of the business has been established, it is important to consider how the business will be divided between the parties. This can be done through a buy-out, where one party buys the other party’s interest in the business, or through a sell-off, where the business is sold and the proceeds are divided between the parties.
It is also important to consider tax implications when handling the division of business assets in a divorce. Businesses are often subject to different tax rules than other assets, and it is important to consult with a tax professional to ensure that the division of assets is handled in a way that minimizes tax liability.
Finally, it is important to consider the impact that the division of assets will have on the operation of the business. In some cases, it may be necessary to reorganize the business in order to accommodate the new ownership structure. This can be a complex process, and it is important to consult with an experienced attorney to ensure that all legal requirements are met.
This is a crowdsourced article. Contributors’ statements do not necessarily reflect the opinion of this website, other people, businesses, or other contributors.
*This article is for informational purposes only and is not intended to provide legal advice. If you require legal advice, please contact a licensed attorney in your local area.
