When you own a business and are going through a divorce, there are multiple unique issues that require extra attention. It is important that you hire aggressive, competent counsel. It is also important that you understand the process so that you are able to have an intelligent discussion with your attorney so that you can actively participate in your case.
Whenever a business is involved in a divorce, your attorney should help you ascertain answers to the following questions:
- Who owns the business?
- What is each party’s share of the business?
- How much is the business worth?
- How much does the business make?
Determining Ownership Interest in the Business
How is the Business Held? Businesses can be held in different forms. For instance, they could be a DBA (“Doing Business As”) or a small corporation. The form of the business matters during a divorce, because it determines how readily the information is available and what documents need to be filed with the court.
Who has ownership interest? Not all businesses are owned by one person. Many businesses have shareholders or partners. This is important to know at the outset, because ownership will determine how complicated the legal issues surrounding the division of the business will be.
For instance, if the business has partners, it will decrease the ownership interest of the spouses. It also may make it more difficult to sell the business or to determine its value.
What is Each Party’s Share of the Business? Not all businesses are divided equally. This partially depends on when a business was started (before or after marriage). It also depends on whether the business has appreciated in value, and if it did, when the appreciation occurred and the reason for the appreciation.
Who gets what portion of the business can range from one party receiving 100% of the value to each party receiving 50%. If one party is entitled to the entire value of the business, the court would deem the business that party’s “separate property.” On the other hand, if each party is entitled to 50% of the value, the business would be deemed “community property.”
Most businesses are a combination of the two, meaning the business was started before marriage and appreciated substantially after the parties married. Determining each party’s share of a business usually requires the appointment of a financial expert to review the books and records. It may also require a court trial.
What is the Value of the Business? Once each party’s share of the business is determined, the court must then value the business. How much is the business worth if it was sold today? The major way a business is valued is by looking at its documented income, its liability and its assets.
Some of the things that will affect the value of a business include:
- Does the business own any real property, such as the building it occupies?
- Does the business own any equipment or furniture?
- Are there any outstanding receivables?
- How old are the receivables? (Are they too old to be collectible?)
- Are there any tax liabilities?
- Does the business have any goodwill?
- Can the business’ cash flow be documented? (Is any of the income paid in non-reported cash?)
What is the Income of the Business? The court will evaluate the income of the business when determining whether a child or spousal support order are appropriate. The most common problem when evaluating the profits from a business is whether the income can be documented. For instance, if the business receives the majority of its payments in cash, it is more difficult to determine the true profits. Depending on the type of business, there are experts that can help with that determination.
However, it is much easier to determine the income available for support if all payments are documented through deposits in a bank account. This will still likely require the appointment of an expert to help the court determine whether all the expenses paid by the business are legitimate expenses. Personal expenses will be added back to the profits and used as income when calculating support obligations.
For more information about how ownership of a business affects a divorce, please call our office to set up a consultation. Our knowledgeable, caring and competent staff are here to help.