Divorce is never easy, but business owners have an extra layer to consider when going through negotiations. Do they share business ownerships with their soon to be ex, or do they cut them out? If they want to cut them out, how can they do so? Are there ways to help reduce the impact of the divorce on the business? These and other questions are common when business owners go through divorce. This post will delve into some of the answers.
What happens to a business when the owner gets divorced?
The exact answer will depend on a variety of things, including when the owner started the business, the type of business structure, and how much of a role each spouse played in the business. Another important factor is where the business owner is getting divorced. State law governs divorce and each state can be a little different.
New Jersey follows the legal theory of equitable distribution when it comes to divorce. This essentially means that the court will divide marital property in a manner that is fair, but not always equal. To make a fair split, the court may consider the length of the marriage, each spouse’s health, age, and income as well as future earning capacity and economic circumstances.
When it comes to the business, the first question the court will ask is likely whether it is separate or marital property. If the business was started during the marriage or experienced significant growth during the marriage, it is likely marital property. If started before and kept separate from marital assets, it could be separate property. If separate property, it will not be divided during the divorce.
If marital property, the business owner could offer another asset in exchange for full ownership in the business after the divorce. Other pieces of property to offer in exchange could include real estate like the family or a vacation home or portions of retirement assets. This would allow the business owner to basically buy out the other spouse’s interest in the business. The right balance will depend on the value of the business. As a result, it is a good idea to get a business valuation before finalizing negotiations.
If both spouses are actively involved in the business and neither wants to step away, they can continue as co-owners. The American Bar Association (ABA) recommends those who take this option set out clear expectations during the divorce to mitigate the risk of problems in the future.
