Obtaining a divorce can be a mentally and emotionally draining process. While a divorce is designed to allow you to exit a toxic relationship and start a new chapter of your life, you should also take steps to protect your hard-earned assets. In particular, you need to take steps to protect the business you built.
How Divorce May Affect Your Business
Depending on the facts of your case and the size of your business, a divorce can affect the value of your business. Specifically, negative publicity or word of mouth can lower the value of your business as it could affect your reputation. Additionally, your business may suffer as you will not be able to devote your full time and attention to properly managing it as your mental energy may be consumed by your divorce.
Factors to Remember When Divorcing with a Business
Under Pennsylvania Law, marital property is subject to being equitably divided between divorcing spouses. Depending on the facts of your case and the history of your marriage, your business may be classified as marital property. Despite this, it is important to maintain accurate records and to continue running your business for a variety of reasons.
Business Valuation
No matter the status of your business, it is important to obtain a proper valuation by a professional appraiser or accountant. Stated simply, the value of your business can affect how property is divided between you and your spouse. There are three methods to determine the value of your business:
- Market Method – an expert uses the value of other similar businesses to determine the value of your business
- Income Method – an expert determines the value of your business based on current and future earnings
- Asset Method – an expert determines the value of your business based on the value of intangible and tangible assets
Identifying Which Assets are Marital or Non-Marital Property
Pursuant to §3501 of the Divorce Code, marital property is defined as any property obtained by either spouse during the marriage. Your business may be classified as non-marital property if you started it before your marriage. However, your business may be classified as marital property due to commingling if your spouse contributed their time or money to the business, or if the money from your business contributed to your marriage, or if your business assets became commingled with your marital assets.
How Management of a Business Continues During Divorce
A divorce can be made even more difficult if your spouse is operating your business. If you and your spouse are on good terms, you should focus on running your business and only maintain a professional relationship. If you and your spouse are on bad terms, you should exercise your ownership or managerial rights pursuant to your business’s operating agreement.
Division of Income During Divorce
Proper record keeping can allow you to accurately document the income you and your spouse earn from your business. Proper record keeping can also prevent or mitigate the effects of your business funds becoming commingled with your marital assets. Additionally, you should not use any business funds to pay for your personal expenses.rce attorney at Schwartz, Fox & Saltzman to learn how we can help you protect your business in a divorce.
How to Protect Your Business During a Divorce
If you started your business prior to your marriage, it may be protected if you executed a prenuptial agreement with your spouse. You may also be able to protect your business by negotiating a marital settlement agreement in which you agree to allow your spouse to claim a larger share of other marital assets. Finally, you can gather evidence showing your business is not a marital asset.
How to Divide Business Assets When Divorcing
If you and your spouse are unable to reach a mutual agreement, there are two ways business assets can be divided. If you have the money, you can purchase your spouse’s ownership interest in the business. Alternatively, you can sell the business and split the profit with your spouse.
Frequently Asked Questions about Divorcing When a Business is Involved
What happens to a business during divorce?
A business may be considered a marital asset, depending on when it was started and how it grew during the marriage. If it is deemed marital property, it will be subject to equitable distribution under Pennsylvania law. The business may be appraised and either divided, offset by other assets, or assigned to one spouse with a payout to the other.
Can my spouse take my LLC in a divorce?
Your spouse may be entitled to a share of your LLC’s value, but not necessarily ownership or control. If the LLC was formed during the marriage, or increased in value during the marriage, that value may be divided.
What assets cannot be touched in a divorce?
Non-marital assets are typically not subject to equitable distribution. These include:
- Property acquired before the marriage (unless its value increased during marriage)
- Gifts or inheritances received by one spouse individually
- Assets protected by a valid prenuptial or postnuptial agreement
However, if non-marital assets were commingled with marital property, they may lose their protected status.
Am I responsible for my spouse’s business debts if we divorce?
Generally, you are not responsible for your spouse’s business debts unless you personally guaranteed the debt or co-signed a loan. However, if marital funds were used to support the business, those contributions may be considered during asset division.
Can I pay my spouse out of my business?
Yes, in many cases, you can structure a payout to your spouse using business income or assets. This can help you avoid selling or dividing the business outright. Your options may include:
- A lump-sum payment using business funds or a third-party loan
- A structured payout plan over time
- Offsetting the business value with other marital assets like retirement funds or real estate
Contact a Divorce Lawyer to Protect Your Business
A divorce can affect the business you built. Due to the very real possibility of your business being classified as a marital asset, you need to take the necessary steps to protect your business. Contact the attorneys at Schwartz, Fox & Saltzman to learn how we can help you protect your business.