Divorce with a Business Involved
If you own a business, it could take a hit during your divorce. Consider using a Pittsburgh divorce lawyer to protect your interests.
Building your business from the ground up is no small feat. It takes intelligence, hard work, and perseverance to take a mere idea and make it profitable. Unfortunately, if you and your spouse decide it is time to divorce, you should contact a divorce attorney, but you should also be realistic about how divorce proceedings may impact your business. Going through a divorce with a business involved can be a troubling time for you; the company and professional reputation you have worked so hard to build may take a hit. However, by working with an experienced business divorce attorney, you have a greater likelihood of protecting your business from the divorce. A business divorce lawyer can help you minimize the impact the divorce has on your business, and guide you through any proceedings you must tend to.
Your Business May Be a Marital Asset
During a divorce, you and your spouse must agree as to whether each asset is individually owned by one of you, or whether an asset is jointly-owned. If there is disagreement over one or more assets, then the court may decided on the division of property.
Based on 23 PA. C.S.A. §3501, assets obtained by you or your spouse prior to marriage are individually owned. However, an individual asset can be converted to marital property over time. Generally, assets obtained during the marriage are considered marital property, though this is not always true.
A business you formed prior to the marriage may be yours alone if you and your spouse never converted it to marital property. This usually means you never used marital funds to support the business and your spouse was never involved with the business’s operations and growth.
If you formed the business during your marriage, it is initially considered marital property, even if your spouse does not technically own any part of the business. Your spouse shares in your ownership interest. Your spouse will have a claim against the business unless you were proactive in ensuring your spouse would not be entitled to any portion of the business through a prenup lawyer or postnuptial agreement lawyer – which is something most individuals do not do.
Additionally, the business may be your property alone, yet your spouse may have a claim against the increase in the business’s value, if that increase occurred during the marriage. If this is the case, you may want to get a business valuation for divorce purposes in order to determine how much your spouse could be entitled to.
Whether or not your business is a marital or individual asset depends on:
- When you formed the business.
- The amount of time between the business’s formation and when you entered into the marriage.
- Whether the business was successful before or after you entered into marriage.
- Whether your spouse was involved in the formation of the business.
- Whether your spouse contributed to the business’s operations or growth.
- How the value of the business has changed overtime.
How Is Your Business Structured?
You may structure your business in a number of different ways, each of which may have different implications for your divorce.
- Sole proprietorship – You may act as a business without creating a separate legal entity. This is often true if you are a freelancer or independent contractor. You may simply work for yourself and offer services or products you make for sale.
- Partnership – You and at least one other person other than your spouse may run a business together. You and your partners divide the labor in some way and share in the profits and losses of the business. There are many types of partnerships. In a general partnership, you are each equally liable for the debts and receive equal portions of the profit. In a limited partnership, there are general partners and limited partners, who are only liable for debts to the extent of their investment in the business. Limited partnerships, limited liability partnerships (LLP), and limited liability limited partnerships (LLLP) often require registration with the Secretary of State.
- Corporation – A corporation is a separate legal entity from its owner(s). You may be the sole owner, which means you hold 100 percent of the corporation’s stock. You may be one of multiple owners, which means you hold only a portion of the corporation’s stock. You may or may not also be on the board of directors or one of the corporation’s officers.
- Limited Liability Company (LLC) – A limited liability company is also a separate legal entity, though it offers a much more flexible structure than a corporation. You may own an LLC yourself or with other people. Going through a divorce when you own an LLC business can be complicated. It is always best to contact a business divorce attorney to help guide you through the process of divorce and LLC business ownership.
Why does this matter? The structure of your business may influence whether it is considered a marital or non-marital asset. If it is a marital asset, then the structure could determine how your business is valued. It may also impact how your spouse obtains their portion of the value. How you handle a spouse’s claim on a general partnership you have with one other person differs from handling your spouse’s claim on shares of a sizeable corporation. Things can be even more complicated if you are going through a divorce when you own a business together with your spouse. However, every situation is different, so it is always a good choice to discuss divorce and business assets with a business divorce attorney.
Protecting Your Business During a Divorce
If the court has determined your business is entirely a marital asset, or its increase in value during the marriage is a marital asset, you may feel defeated. You may feel like your spouse is going to take you for all you are worth and ruin your career. There are steps you can take to minimize the damage to your finances and the business.
Your business divorce lawyer may advise you to:
- Keep funds separate – If any of the business’s funds are co-mingled with your personal funds, separate them. Make sure that the business has its own separate bank accounts.
- Fire your spouse – It is best to end your professional relationship with your spouse or to limit their involvement in the business. The longer or more involved they are in the business, the greater their ability to argue they are essential to the business and its value. Firing your spouse may feel harsh, yet it demonstrates they are not integral to the business.
- Pay yourself an appropriate salary – Over the years, you may have paid yourself little to nothing from the business. You may have preferred to put as much profit as you can back into the business. However, if you do not make anything from your position in the business, your spouse may claim you deprived them of funds you had access to during the marriage.
- Obtain a business valuation for divorce purposes – Determining the value of any business is challenging, and during a divorce, you and your spouse may argue over the most appropriate valuation method, which depends on a number of factors. You should obtain a current valuation of the business for divorce purposes, not one based on future projections.
- Prepare to give up other assets – If maintaining your full ownership interest in the business is important to you, then you need to prepare to give your spouse their value some other way. This may mean giving up other high value assets.
- Create a payment plan – When your spouse is entitled to a certain amount of value from the business, you should negotiate to pay this value over a period of time. Handing over a lump sum to your spouse can be financially difficult or impossible.
Paying Your Spouse Their Share of the Business
If your business or its increased value during the marriage is considered marital property, then you need to speak with your business divorce attorney about how you will provide your spouse with their fair share of the business.
You may use marital assets entirely to cover your spouse’s share. Your husband or wife may walk away with a greater amount of other assets than you to cover the value they were entitled to in relation to the business. You should speak with your business divorce lawyer to get a clearer understanding of your divorce and business assets and what your best course of action is moving forward.
You may pay your spouse over time from the profits of the business. You and your spouse would negotiate the terms of a property settlement, which may include you paying a set amount or a percentage of the business’s profits over a period of time. For instance, you may pay a monthly amount for five years. Or you may pay a certain amount each quarter until a final amount is reached.
If you are contemplating going through a divorce when you own a business together with your spouse, then it may be the business that needs to buy them out. Your business may need to raise capital, such as through investors or a loan, to buy your spouse’s shares.
The last resort is to sell the business and divide the final profit of the sale. If there is no other way to buy out your spouse’s share of the business and move forward with it on your own, then selling the business may be the only option. This may also be your preferred method of handling the situation if the business was entirely run by you and your spouse, or if you are ready to retire.
A Business Divorce Attorney Can Help
Going through a divorce when you own a business is both difficult and scary. It is hard enough to cope with the end of your marriage, let alone a possible disruption to your livelihood. Rest assured, a divorce does not need to mean the end of your current career. By working with an experienced business divorce attorney at Pittsburgh Divorce & Family Law, LLC, you can protect your business from the hardships of divorce. You may be able to establish that your business is non-marital property. However, if it is a shared asset, there are ways you can limit what you or the business owes your spouse.