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If you are getting divorced and you own a business, dividing the marital property becomes more complicated. Your business is probably one of the most valuable financial assets you own. Additionally, if you are a business owner, you most likely have a significant emotional attachment to your business. You’ve invested your blood, sweat and tears into nurturing and growing your business. The following are 5 important considerations to keep in mind if you are a business owner headed for divorce:
This may be the most important piece of advice you will get. The rule of thumb in separate versus marital property is this: if the business is acquired during the marriage, with joint funds, then it is considered marital property and the value should be shared equally by the spouses. However, if the ownership interest in the business occurred prior to the marriage, or was acquired with separate funds, then it should be considered separate. An attorney or accountant can review these crucial factors and help determine whether the business interest is marital or separate. First, compare the date of the marriage and the date the business interest was acquired. Second, determine the source of funds used to start the business. Finally, assess the financial and labor-related contributions to the business given by either spouse during the marriage.
If the business is marital property, you need to determine how to value the business in order to divide it. There are three basic ways to value a business:
If your business is marital property (most are), you are going to have to decide how you are going to divide it. There are three options in terms of distributing a business interest: (1) the buy-out; (2) co-ownership; and (3) sell the business.
Any business consists of two components: an asset and an income. An asset means that its worth something on the open market. An income means that it generates revenue. Its value in generating income is what comes into play with spousal support. The significance in recognizing its value in generating income is that if you are the spouse with the business, you want to make sure the other party doesn’t “double dip.” In other words, if you are paying your ex-spouse half of the value of the business as a property settlement, you don’t want to let them also receive income generated by the business.
If you are the spouse who is giving up his or her half of the business ownership in the divorce, you want to make sure that your former spouse is liable for all debt related to the business and will indemnify you and hold you harmless from all debts and any liability claims that might arise in the future. This provision needs to be broad enough to include liabilities arising from tax returns that were done improperly.
When you are going through a divorce and business assets are at stake, dividing the marital property becomes more complicated. It is always best to consult with both an accountant and an attorney to obtain an accurate business valuation and to know your legal rights when it comes to dividing the business.