Family Business Options When Spouses Divorce

Depending on the situation between spouses during the divorce, a business could survive the process even if both own the entity equally or with a certain amount of vested interest. However, many companies fail or proceed through a sale when the spouses are unable to resolve business matters when dissolving the relationship.

What happens to a business after and during a divorce often depends greatly on a joint or sole ownership with one or both spouses. If the two own the business, it is possible to enter into arrangements for one to take the interest of the rest of the company through a purchase. If the other party is unwilling to accomplish this, the business may remain with both owners. However, a court order may divide the company or require a sale so both parties may collect the proceeds as part of the divorce settlement. In peaceful divorce processes, the two spouses may find mediation as a way for the company to survive the dissolution of the relationship.

The Effects of Divorce on the Business

Community property states may require giving up half the business to the other spouse at the time of divorce. Equitable distribution states may require a redistribution of the interest owned by each spouse depending on other assets in the estate. It is important to protect the company before the divorce becomes an eventuality. This is possible through a business succession plan enacted before the splitting of spouses. Another way is to sell the business as a whole and divide the proceeds equally. Some owners may need to purchase the interest from the other spouse long before the relationship ends.

Sale of the Business

If the owner or dual ownership exists between spouses and the only assets come from the company, the court may order the couple to sell the business and divide the proceeds. Unless the couple has a postnuptial agreement that protects the company from a sale from a divorce process, the judge has the power to order the sale for asset division or spousal or child support. If the couple agrees on the situation, it is possible that the sale of interest in the business may proceed without selling the company completely. Then, assets still exchange hands, but the entity remains intact. However, proceeds from sales with the company may still transfer in a certain amount for spousal support.

Bankruptcy of the Company

If the business is running in the negative, the owner may proceed through bankruptcy at the same time as a divorce. It is normally crucial to only complete one of these processes at a time, and the owner may still file a Chapter 11 and save the company through a reorganization and restructuring. However, if too many debts exist in excess of sales revenue, the owner may have no choice but to complete bankruptcy. In these circumstances, the owner has no assets from the company and both relationship and entity dissolve. The owner may need a lawyer to proceed through both divorce and bankruptcy.

Separate Property

In the event that the spouse started the business before marrying the other individual, he or she may keep the company as separate property. This is also possible by creating and using a postnuptial agreement to provision the entity as a separate piece of property from the marriage. This could keep the courts from dividing the entity for asset division if the postnuptial agreement is enforceable in the courtroom. The business owner will need to have a lawyer review the document to ensure no state law violations occur and that the provisions are sound.

Increases in value with the business may become part of marital property when the two spouses divorce. This increase in value does become an issue when dividing assets. The value itself may remain subject to distribution between the two parties. This division is also possible if the spouse contributed financially or in another manner to the company. He or she would have the option to regain his or her contribution at the time of divorce or through a settlement in some manner. If the other spouse is agreeable, the company may remain intact with revenue profits transferring to him or her through time to cover the contribution.

Legal Help with the Business

A business lawyer may need to assist the spouse in keeping the business from sale or division. By hiring a legal professional, the owner may protect the business entity for future opportunities.

Provided by HG.org