Obtaining a divorce can be a mentally and emotionally draining process. While the divorce process allows 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 should consult a family law attorney to protect a business you built.
SFS Attorneys outlines factors to remember when going through a divorce as a business owner.
Factors to Remember When Divorcing with a Business
Under Pennsylvania Law, marital property is subject to equitable distribution between divorcing spouses. Depending on the history of your marriage, your business may be classified as marital property. Despite this, it is essential to maintain accurate records and continue running your business for various reasons.
No matter the status of your business, it is essential to obtain a proper valuation from a professional appraiser or forensic accountant. Stated simply, the value of your business can affect how property is divided between you and your spouse during your divorce. There are three methods to determine the value of your business:
- Market Method – an expert uses the value of other similar companies 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
The method used in your situation will be determined by a forensic business valuator or forensic accountant. Not all accountants or planners are trained to perform this analysis.
Identifying Which Assets are Marital or Non-Marital Property
According to §3501 of the Pennsylvania Divorce Code, marital property is all assets acquired by either spouse during the marriage. Your business might be classified as non-marital property if you started it before your marriage. Even if the business was started by you before the marriage, the increase in value of the business during the marriage is a marital asset. If there is a properly drafted premarital Agreement which excludes the increase in value as marital, that would protect the business.
How Management of a Business Continues During Divorce
A divorce can be made even more difficult if your spouse is operating your business. If your spouse is your business partner, and you are both on good terms, you should focus on running your business and 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, if that is necessary. Speaking with a business lawyer might be in order.
Division of Income During Divorce
Proper record keeping can allow you to accurately document the income you and your spouse earn from your business. Accurate record-keeping can also prevent or mitigate the effects of your business funds becoming commingled with your marital assets. Additionally, if you use any business funds to pay for your personal expenses including your divorce, those funds will have to be accounted for as personal income by your accountant.
Protecting Your Business During a Divorce
If you started your business before your marriage, it might be protected if you executed a prenuptial agreement with your spouse, as stated above. You may also be able to protect your business by negotiating a marital settlement agreement which amicably divides the value of your business between you and your spouse, or in which you use other assets outside the business to resolve your division of property issues.
Business Asset Division in Divorce
If you and your spouse cannot reach a mutual divorce settlement, there are two ways business assets can be divided. You can purchase your spouse’s ownership interest in the business if you are able to do so. You can obtain funding from a third-party source in order to assist with this purchase. If this is not financially possible, a pay-out over time to your spouse is certainly a possibility. Lastly, and most regrettably, selling the business in order to fund the division of assets is the worst possibility, and one that is a solution of last resort. This is especially true if the spouse who wishes to continue to operate the business after divorce has a support or alimony obligation to the other spouse. To force the sale of business “kills the golden goose” and does not benefit either party.
Summary of Divorcing with a Business
A divorce can affect the business you built. Due to the genuine possibility of your business being classified as a marital asset, you must take the necessary steps to protect your business. Contact the family law attorneys at Schwartz, Fox & Saltzman to learn how we can help you protect your business.