Splitting Business Interests When You Split with Your Spouse
If you own all or part of a business enterprise and you’re getting divorced, your stake in the company may be not be yours to keep. Your spouse may be entitled to an equitable share of your ownership, even if he or she played no part in acquiring or running the business. The key question is to what extent your business interest will be considered marital property or separate property.
New York courts apply the rule of equitable distribution when dividing a couple’s marital property in a divorce. Marital property consists of all assets acquired by either spouse during the marriage, while property owned by a spouse before the marriage is generally considered separate property. However, any increase in the value of separate property during the marriage can become marital property if the other spouse contributes financially or through other efforts.
In the case of business ownership, the court will look not only at whether the business was established before or during the marriage but also at how much it grew during the marriage. In addition, the court will consider whether the spouse without ownership in the business made some other form of contribution — economic or otherwise — that helped the business prosper and grow.
The next step is to figure out what the business is worth. Privately owned businesses require special valuation techniques, since their value cannot be readily measured by market indicators. The most straightforward approach is for the spouses to agree on its value. If an agreement cannot be reached, then the spouses must enlist the help of one or more third-party experts who can make independent assessments.
After the value of the business is calculated, the court will allocate that value according to the equitable distribution plan that controls all marital property in the case. However, the court or the spouses must then decide upon the preferred way to distribute the ownership. There are several possible approaches. One spouse can trade the other marital assets of similar value in exchange for the business interest. Another way is for one spouse to buy out the other spouse’s business interest. As a last resort, the business can be sold and the proceeds divided.
The most effective way to protect your business interest against division in a divorce is to have a prenuptial agreement or postnuptial agreement that details the approach that will be used to calculate the value of the business, along with how it will be split should the marriage fail.
The Law Office of Maurice J. Verrillo, P.C. provides effective family law services in Rochester and the surrounding areas. Mention our website when you call us at 585-563-1134, or contact us online and receive a free 30-minute initial consultation. We offer convenient business hours and offer evening and Saturday meetings by appointment.