Do I Have a Right to a Family Business in Divorce?

Overview

Most states determine how to distribute property between spouses according to equitable distribution principles. These states attempt to give each spouse a “fair” share of marital assets, but they are not required to provide a 50/50 division. Other states recognize community property principles and find that property and income during the marriage is owned in equal parts by both spouses, absent an agreement to the contrary or special circumstances.

Although divorce is often an emotional ordeal, its roots are based on a financial and legal severance of two people. As part of the divorce process, the assets the couple acquired must be divided. When a family business is at stake, both spouses may have an ownership interest in the business. If the parties are unable to work out an agreement on their own, the court will apply the relevant rules to distribute property between the spouses.

Classifying a Family Business

In order to determine ownership rights to the business, the court must determine whether the business is marital property or community proper, whichever applies. In order to classify the business, the court may evaluate a number of factors. For example, the court may look at the date the business was established, the nature of the funds used to start the business, the contributions both parties made to the business, the skillset needed to successfully run the business, the value of the business before the marriage and at the time of divorce and the change in value of the business.

The business may not be considered separate property even if it was established before the marriage. For example, if the parties mingled separate and marital funds during the marriage into the business or if the non-owner spouse quit his or her job to contribute to the business, a concept called transmutation may apply which means that personal separate property becomes marital property.

Likewise, a business acquired during the marriage may not be considered marital property if it was purchased during the marriage in some cases. For example, a family business that was inherited or received as a gift may not be marital property. Alternatively, a written agreement between the spouses may allow just one spouse to be considered the owner.

It is also possible for part of the business to be considered separate property and part of it to be considered marital property. Both spouses may not have an equal share in the business, either. Additionally, the ownership interests of other partners must also be considered.

Valuing the Business

Once the classification of the business is completed, the business may need to be valued. There are a variety of ways to determine the value of the business. One way is to estimate the value of the business by comparing it to a similar business. This is similar to looking at comparables on the real estate market. Another way to evaluate the business is to have a forensic accountant or professional appraiser review information about the business, including tax returns and financial statements in order to determine an independent value of the business. The asset approach compares the assets and liabilities of the business to determine the value. Finally, the income approach places a value on the business by looking at the cash flow of the business.

In complex cases, expert witnesses may testify about the value of the business and how that number was figured. The judge will ultimately make a decision on the value of the business. Some states allow the judge to consider the business’ good will while others do not. Good will is basically the value associated with the business’ reputation.

Once the judge determines the value of the business, he or she does not usually award the right to the non-owner spouse to run the business. Instead, this spouse is awarded his or her portion of the business’ value.

Provided by HG.org

Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws and.how they may affect a case.

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