What Happens to the Family Business in a Divorce?
May 12, 2015
When a couple divorces, the spouses have to disclose all of their assets so that the court can make determination regarding alimony, child support, and the equitable distribution of property. Often, divorcing couples have a family-owned business. Businesses, like other property, are subject to equitable distribution by the court.
Businesses are different from other types of property. One major difference is that the value of business requires the owners to put their time and work into it, but after divorce, a couple often does not want to run a business together. But a business cannot simply be split in two, with one spouse getting each half, because half a business cannot function, and so does not have much value.
Which Businesses Are Divided?
The first issue in dividing a business is to determine which businesses, or which portions of a business, are included. If the business was started during the marriage, it is probably a marital asset, and thus subject to equitable distribution. However, if it was started premaritally, it is likely a nonmarital asset. However, it may still have some value as a marital asset. For example, if the value of a business increased during the marriage, then that increased value may be a marital asset.
Valuing the Business
A business may be valued in two ways: as an ongoing business, which assumes that the business will continue after the marriage ends, or by calculating the liquidation value of the business. If the business is valued as an ongoing business, the court may look at the fair market value of the business or may calculate how much income it generates. The trial court has discretion in deciding which valuation method to use. The decision depends on the facts and circumstances of the case, and is usually made with the help of expert testimony. The value may be difficult to determine because small business owners often do not keep meticulous financial records.
Dividing the Business
Upon divorce, the business may sometimes be dissolved entirely. To dissolve a business, an Article of Dissolution must be filed with the court, once all shareholders agree to the dissolution. The liquidation value of the assets would then be divided between the spouses.
Alternately, the business may be reestablished under new ownership. If this happens, one spouse must essentially buy the other out. Under Florida’s equitable distribution laws, a divorcing couple’s assets are divided equitably, though not necessarily equally, between the spouses. A business is one of a couple’s assets, so it must be taken into account when dividing the property between them.
The default is to split a business 50/50, but that is not always appropriate. Courts may, for example, look at whether one spouse started the business before the marriage. Another important consideration is who provides the most value to the business—who does the work, knows how to run the business, etc. For example, if the business is a dental practice, and the wife is the dentist while the husband works the phones, the main profit comes from the wife. Another consideration is whether one spouse’s duties can be taken over by someone else. It would be easy to hire a new receptionist, but not so easy to hire a new dentist.
Sometimes, the divorced spouses may be able to agree to run the business together, despite their personal differences. In this case, each spouse could retain a 50% ownership interest, or other appropriate division, in the business.
The division of a family business in a divorce in a complex matter, and can have a huge financial impact on the spouses. The advice of an experienced attorney is essential to ensuring that the business is divided fairly. Please contact West Palm Beach family law attorney William Wallshein for a free initial consultation.