Owning a business is a huge achievement, but divorce can complicate handling that success. Many contemplating divorce reasonably wonder what happens to a business in a divorce. How can you protect your assets while ensuring a fair outcome?
Below, the team at Plog & Stein P.C. will explore the key issues surrounding divorce and business ownership, clarifying what to expect and how to protect your financial interests.
How Does Divorce with a Business Affect Ownership?
Various factors will impact how a divorce and business ownership impact one another:
- Ownership structure—whether the business is a sole proprietorship, partnership, limited liability company (LLC), or corporation;
- Prenuptial agreement—if a prenuptial agreement is in place, it may outline how you want to divide the business in case of divorce;
- Marital property laws—Colorado laws typically consider businesses acquired during the marriage to be marital property, subject to equitable division between the spouses.
An experienced divorce attorney will know how your ownership structure and other factors impact the division of your company. Such a professional knows how to safeguard your financial interests.
Is Your Business Marital or Separate Property?
One of the first questions in any divorce with a business involved is whether the court categorizes your company as marital or separate property. Colorado is an equitable distribution state, meaning that marital property is divided fairly—not necessarily equally—during a divorce. But what determines whether your business is included in the marital estate?
- Marital property. If the business was established or significantly expanded during the marriage, it’s likely considered marital property. The company’s value or increase in value during the marriage could be subject to division.
- Separate property. A business started before marriage may be considered separate property. However, if you contribute marital funds or significantly expand your company during the marriage, the court could consider part of the company as marital property.
The court will examine factors such as when the business was founded and whether marital assets contributed to its growth.
How Is the Business Valued in a Divorce?
Once it’s determined that the business is subject to division, the next step is business valuation. Accurately valuing a business is crucial to ensuring a fair division of assets. Experts such as forensic accountants or business appraisers are often brought in to evaluate the company’s worth in Colorado.
Business valuation methods vary but typically include:
- Asset-based approach— calculates the business’s net worth by subtracting liabilities from the total assets;
- Income approach—focuses on the business’s potential to generate future income, applying discounted cash flow or capitalization of earnings; and
- Market-based approach—compares the business to similar businesses that have been sold recently.
The chosen valuation method can significantly affect your financial settlement, so it’s essential to understand how to best evaluate your business’s worth.
What Are Your Options for Dividing the Business?
When it comes to divorce and business division, you generally have three options.
Option 1: Buyout
In many cases, one spouse buys the other’s share of the business. A buyout allows the company to stay operational while ensuring your spouse receives a fair share. If you choose this route, you may need to refinance or take on new debt to secure the funds for the buyout.
Option 2: Sell the Business
Another option is selling the business and dividing the proceeds. This option is often used when neither spouse wants to continue the company or a buyout isn’t financially feasible. However, selling can be complicated, especially if market conditions aren’t favorable.
Option 3: Co-Ownership After Divorce
While less common, some spouses agree to continue co-owning the business after divorce. If you and your spouse can maintain a professional relationship, this may work, but it’s crucial to have a clear co-ownership agreement to avoid future disputes.
What Happens in Divorce When You Own a Business with Your Spouse?
Divorce for business owners can become even more intricate if you and your spouse co-own a business. The business’s structure dictates how ownership is handled in a divorce. Partnership or shareholder agreements may include buyout clauses that can guide how to manage your ownership interests.
Your financial stake in the business must also be considered part of the divorce settlement. When both spouses have made equal or substantial contributions to the company, the division process may involve more negotiation and the help of legal experts to ensure fairness.
What Are the Tax Implications of Dividing a Business?
Dividing a business in a divorce isn’t just about deciding who keeps the company or how the assets are split. The division of a company carries significant tax implications, especially regarding:
- Capital gains taxes,
- Business income, and
- Debts.
Selling the business could lead to capital gains taxes for both parties. This expense could significantly impact your final settlement. But, if one spouse buys out the other, the business’s income and tax burden shift entirely to the retaining spouse.
Discussing these issues with a tax professional and your divorce attorney is essential to avoid costly surprises and unfair settlements.
Important Legal Considerations in Divorce with a Business Involved
Various legal issues can arise in your divorce when you own a business. Let’s look at some of the issues you may need to address that go beyond valuation and property division.
Prenuptial or Postnuptial Agreements
If you have a prenuptial, postnuptial, or separation agreement in place, it may outline how the business is treated during a divorce. Colorado courts typically enforce these agreements if they were drafted and entered into in a legally valid and fair manner.
Debt and Liability
If your business has debts, those liabilities may also be subject to division. Be prepared to address how you plan to handle business debts.
Non-Compete Clauses
Suppose one spouse is heavily involved in the business’s day-to-day operations. In that case, a non-compete agreement may be necessary to prevent that spouse from starting a competing business post-divorce.
Take Action to Protect Your Interests Now
If you are going through a divorce with a business, the outcome can have long-lasting financial consequences. Protecting your business interests is essential, and the best way to do that is by working with a knowledgeable divorce attorney who understands how divorce law intersects with business ownership.
Plog & Stein P.C. understands how important your company is to you. Whether negotiating a buyout or protecting your financial future, our team is ready to stand by your side and ensure you move forward confidently.
Contact us today for personalized, results-driven representation that will help safeguard your future.
Resources:
- Divorce and Separation. Colorado Judicial Branch, link
- Business Valuation Issues in Divorce. Mariner Capital Advisors, link
- Divorce and Business Owners: 7 Things You Need to Know. Equitable Mediation (2024), link
