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Expert Answers to Biz Questions
Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.
What Happens to Your Business When You Get Divorced?
Navigating divorce can be very stressful, especially if you have a lot of assets involved. Splitting those assets is one of the most difficult parts of the divorce, and you’re not always happy with the result.
“There’s a reason divorces often take 18-plus months and thousands of dollars to complete,” says an article from Rowdy G. Williams Law Firm in Indiana. “Put simply, it’s not easy to legally divide intertwined assets and sift through the he-said-she-said mess of determining who is to blame for specific incidents or situations.
The business you’ve labored in for years may be among your most valuable assets. Unfortunately, your business may be at risk during the divorce. Here’s what you need to know:
Your business is safe if you took proper steps ahead of time.
When you incorporated your business, did you make it divorce-proof? Many people don’t think about this. When you’re happily married, why would you consider the possibility? However, happy marriages don’t always last, and unfortunately, 40-50 percent of marriages fail. If you’re a smart business person, you’ll take steps early to guard against divorce.
"You get married young with no prenup and you have a $100,000 business. . . not anticipating that, 20 years later, it's a $5 million business, and now the spouse has some stake in the growth of the business,” New Jersey attorney Robert Kornitzer told Entrepreneur.
Kornitzer recommends taking a few essential steps to protect your business against divorce including:
- Make the business a sole proprietorship in your name only.
- Keep family finances separate from your business account.
- Pay yourself a good salary.
- Sacrifice other assets during a divorce so you can keep your business safe.
- Create a buy-sell agreement that limits your spouse’s ability to acquire ownership.
- Take out a whole-life insurance policy that can allow you to buy out your spouse’s share.
- Don’t use your spouse to take tax breaks.
By taking proactive steps while running a business, you can eliminate concerns about your spouse taking your business during a messy divorce.
You may have to give up half of your business.
If you haven’t been proactive in protecting your business during a divorce, the court might require that you split the difference.
“You may have to give up half of the business in community property states or a similar amount in equitable distribution states, where equitable means fair, not necessarily equal,” explains Ronna L. Deloe, Esq, in a LegalZoom article. “…Giving up half the business could mean that other assets can be paid to your ex.”
Deloe also illustrates a scenario where you’re forced to liquidate your business and split the proceeds. This is very unlikely if the business is the sole source of income for the family, but it may be possible if it’s a side business. “This may be the only solution that works according to the divorce mediator or judge,” Enloe states.
There are many things that go into a court-ordered decision to split the business during a divorce. If you started the business before you were married or it’s in your name only, and you never involved your spouse, you will likely avoid a split.
However, if you’ve involved your spouse heavily, including financial and emotional support, a good lawyer can help your spouse take some of your business. Often, the value of a business will increase considerably during a marriage, and if the spouse contributed heavily to that growth, it’s subject to distribution.
“If the business increased in value during the marriage, that increase in value could be considered marital property,” Enloe says. “Anything that is considered marital property is fair game and can be divided between the spouses. In this scenario, the increase in value can be subject to an equal or equitable distribution.”
Divorce is only made messier when you have to incorporate the splitting of assets. Put simply, your business is at risk during the divorce, but you can take steps now to protect your business and eliminate some of the hefty financial repercussions that can come with the ending of your marriage.
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