Dividing the Assets: Is a Business an Income or an Asset?
Are you a business owner facing divorce? Are you the spouse of a business owner facing divorce? Either way, you probably have questions about how the business is handled during the division of assets. Is the business divided? How is it divided? Is the spouse of a business owner entitled to half of the business in divorce?
First Things First: The Business Must be Evaluated
A business is an asset. Like any other asset in a marriage (house, car, etc.) determining how it will be divided is based on characterization and valuation. Characterization determines what type of asset the business is: community property considered jointly owned, separate property considered a personal asset and not subject to division upon divorce, a combination of both? Valuation determines what the business is worth in terms of an actual dollar value. It is a complex process handled by a financial expert who will review company records in connection to income, assets, expenses, liabilities, and projected future income. All the factors are taken into consideration together and provide an overall value. These factors will determine if the business owner’s spouse is entitled to part of the business in divorce and if so, how much they are entitled to receive.
Common Methods of Dividing a Business in Divorce
When a business is determined to be community property or partially community property, it must be divided to provide both parties involved in the divorce with fair compensation. Courts typically use one of three methods to divide a business for the purposes of asset distribution during divorce.
- One party in the divorce receives the business and the other receives financial compensation. This method is the most common. Typically, the spouse with a greater involvement in the business receives the business and their spouse is awarded compensation based on the valuation and characterization of the business.
- The business is sold outright and the proceeds of the sale are divided amongst the two parties. This option is not as common as the first, but it can be the solution in cases where there is no agreement about who should be awarded the business. For instance, when both spouses feel entitled to the business, but neither wants to claim ownership or when both spouses want the business but it doesn’t generate enough income to compensate the spouse who doesn’t receive the business. This option can often be difficult as it can be hard to find a buyer, but it can be a good idea in some situations.
- The business continues to be jointly owned and operated by both divorcing parties. Co-ownership is also considered a viable option for dividing a business during divorce. It is fairly rare for the obvious reason that most divorcing couples do not want to continue working together as business partners post-divorce.
If you are worried about how your assets or your business will be divided during your divorce, get in touch with an experienced divorce attorney at The Maggio Law Firm today.