How could divorce affect your small business?
For small business owners, divorce can create a lot of anxiety. Owners or operators of start-ups, family businesses or even family farms can suddenly find themselves in complex, technical discussions on how to properly “divide” their business.
Like many who go through a divorce, you may be unprepared for what comes next. Whether your marriage preceded the start of your business or you understandably never anticipated a divorce, the future of your business may suddenly be a little uncertain.
Is a small business considered marital property?
In Pennsylvania, the division of marital property is known as equitable distribution. This means that all assets and debts in a divorce must first be qualified as marital or separate property. The marital property is then fairly distributed among the two divorcing spouses according to a series of factors in the Divorce Code.
Separate property includes anything earned prior to marriage, inherited by one spouse or gifted to one spouse by someone other than their spouse. Thus, if the business was created or founded after marriage, it will be treated as marital property.
Common options to equitably divide a business
To equitably divide business interests, determining the true value of the business is typically the first step. Other factors considered include the nature of the business, its formal structure, the roles of each spouse and more. If you and your spouse are both actively involved in the business, here are three common options to consider:
- Continue owning the business together. If your relationship is amicable and the arrangement seems not only possible but ideal, this may be a suitable option for you. A valuation of the business may be unnecessary for this option.
- Spousal buy-out. Buying out your spouse’s share of the business is a common approach. Determining the true value of the business, as well as the full contributions of each spouse, are very important to establish a fair buy-out.
- Sell the business. In some cases, a sale may be the best agreed-upon option. You and your spouse will then equitably divide the assets from the sale.
Protecting your business
Divorce can wreak havoc on an otherwise stable business. Any property division dispute in a divorce can become contentious and frustrating. Working with a team of dedicated professionals to properly value and assess your business can help ensure a fair outcome that allows you to move forward.