If you are going through a divorce and own a business, you need to take careful steps in order to ensure that your spouse will not be able to take what you worked so hard to build over the years.
You have put blood, sweat, and tears into your business, and your hard work has seen it thrive. Now that you are going through a divorce, it suddenly seems like your time and diligence to your company are being treated as meaningless. Who gets to benefit from all your effort and work? Who has the right to your business?
Dividing a business can be one of the most contentious and misunderstood parts of a divorce. When a couple divorces, each spouse must ask themselves important questions, such as whether they want ownership of the business, whether they want to work for the business, and whether they even care if the business continues on. These are just a few questions that come up when dividing a family business during divorce proceedings.
A divorce lawyer at the law firm of Melone Hatley, P.C. is ready to fight with you to protect your business. We will provide legal advice and planning that will protect your business interests, and work toward making sure that the division of assets in your divorce case is fair.
Virginia is not a community property state, and Virginia does not generally recognize community property. Virginia is an equitable distribution state. This means that in order to divide the Marital property the court must decide which property is marital property and which property is separate property.
The difference between marital property and separate property is not always clear when it comes to the division of marital assets during the divorce process. Even something like a business interest can be both marital and separate property. An understanding of the meanings of each classification of property can help you as you seek a fair divorce settlement.
Marital property is any property that was gained during the marriage. If you and your spouse buy a house together after you are married, for example, the house may be marital property. This is generally the case even if only one spouse’s name is on the mortgage. The same goes for credit cards, cars, and other assets purchased after you are married.
Separate property is property that spouses owned before the marriage. If you owned your house or car before you got married, that property generally remains yours. Courts may sometimes still choose to consider property as jointly owned or hybrid property if both spouses contributed to the upkeep and maintenance of the property during the marriage.
Inherited property, in addition, is separate. That means if a relative passes away and leaves you property or money in their estate, that property remains yours and is not subject to co-ownership in the marriage so long as that property is not commingled with marital assets.
This is to say that just because property is separate, that does not mean your spouse cannot claim an interest in it during the divorce. A marital home is a good example of property that may be separate but still considered part of the joint estate.
The simple answer to this is yes, a business is considered part of your marital estate and may be considered marital property. It can be divided up as part of marital assets in a divorce. This happens regardless of whether the business is a family business started or acquired during the marriage or whether you were the sole business owner before you got married. Your spouse’s specific ownership interest could have even been earned by working for the business. In a divorce, in many ways, co-ownership is assumed.
Every aspect of your business can be considered a marital asset in your divorce’s property settlement. This includes any debt your business may have racked up. The various aspects that commonly come up as business assets in a divorce include:
Part of what your divorce attorney will do is fight with you to protect your personal assets from being considered part of the business. This is part of why it is so necessary to have a qualified divorce and family law attorney working on your case.
Money involves all the liquid assets of a business. Any profits or cash for operating expenses that you have in bank accounts is money as far as the business is concerned and will be part of any business valuation.
Business debt is also property. This includes business loans, credit cards, lines of credit, and any other liens and liabilities that may exist against your business. Debt can help to offset the value of the business, as both spouses will be considered equally responsible for paying it off.
Your house may or may not be part of your business debts, depending on what kind of business you have. An LLC, for example, exempts personal property from being at risk from business debts. If, however, you used your house to leverage money for your business, such as using it as collateral for a business loan, it may become part of the business assets and market value.
Retirement accounts, likewise, can be part of the business under specific circumstances. If you used a retirement account to fund your business, it may become part of the assets. If the retirement account is attached to the business, it can be part of the business and may be divided as part of the divorce.
The business itself is at the core of the division of assets. It will have to be properly valued before the court can determine what portion of the business each spouse is entitled to receive.
Patents and trademarks have inherent value and can be part of property division and property settlement as part of the business or even separately. It is possible, for example, for one spouse to win the business, but the other to win rights to intellectual property like patents and trademarks.
Vehicles can be considered part of the business if used as collateral in a business loan, or if it can be shown that the vehicles are used as part of the business practices. If, for example, you use your personal car to drive packages to the post office for shipping, it can be considered a business vehicle even if it is not formally part of a business vehicle fleet.
Because Virginia is an equitable distribution state, the courts do not split everything down the middle. “Equitable division,” in this case, does not mean equal, but fair. That means the courts will determine what is fair to each spouse. It considers, for example, what each spouse needs to maintain their current standard of living. If one spouse lacks the ability or training to work, for example, they may be given more assets to maintain their lifestyle while they seek such training and work.
Property that can be issued to your spouse can include things such as child support, alimony, physical property, and any share of the business the courts deem appropriate.
It is not uncommon in a divorce for the spouse who wants to keep the business to downplay its value, while the one that just wants to profit to heighten the value. This is why it becomes important to have a third party place a real value on the business or do a business valuation. This helps to determine what share each spouse deserves.
When determining ownership stakes, the value of a business has four elements: intangible property, tangible property, assets, and liabilities. Tangible property includes machinery, equipment, inventory in stock, buildings you own outright, and any cash in bank accounts. Intangible assets are those that are difficult to value but also form an inherent part of the value of the business. They include things like your reputation and goodwill, customer relations, community participation, and the like.
Liabilities come into play as well. Any rent you pay or mortgage you owe, equipment leases, lines of credit, regular services for which you pay, and other liens and debts are all types of liability that affect the business valuation.
Finally, profit counts toward your assets, as does the value of stock or private shares held by any shareholder. An accredited appraiser will take all of this into account when determining the value of your business.
In Virginia family businesses, both spouses generally contribute, even if only one spouse owns the business. The other spouse will offer help when needed as well as intangible support, such as taking care of household needs while the business owner can focus on the company. They help to spread the word by marketing the company and offering moral support. All of these things are important to the business operation, and all are considered by the courts when dividing assets.
Because of this, many factors come into play as the court determines your business assets in a divorce. First among these is the spouse’s interest in the business, and whether the spouses are business partners or one spouse has run the business largely on their own.
Several scenarios can result.
First, and most often, the spouse who has a greater involvement gets the business, while the other spouse gets compensated for their ownership stake. In the case of a professional practice, for example, the accredited professional will maintain ownership of the business.
Second, the court will recommend or even order selling the business off to split the profits. A business can be sold to a third party that can then employ one or both spouses based on their contacts and skills.
Third, and rarest of all, the divorced spouses can continue to operate the business jointly as business partners. This usually only happens in an uncontested divorce.
In the end, it is often best for all involved to agree on a buyout of one party by the other. Buying out your spouse’s business interest depends on the business valuation, the value of each equitable share, and the terms of the buyout.
Finally, the spouses can agree to split the business. This generally only works in cases where there are multiple locations in play. A restaurant or store, for example, that has two locations can be split with one location going to each spouse. Depending on the agreement, the locations can be split to become two separate businesses (possibly still using the same name, depending on the specifics of the agreement) or can continue to be managed under one blanket company.
A qualified and experienced divorce attorney in Northern Virginia can help you make the right decision. If you have other business partners, they may have a say in how this all plays out as well.
A prenup or a postnuptial agreement can be considered when a family business is divided. These agreements can save couples a great deal of trouble when the time comes to divide family assets. Most attorneys agree that it is wise to have a prenuptial agreement in place if you have a business before the marriage and that a postnuptial agreement should be created as part of your business establishment if you start up the business after you are already married.
Either type of agreement should provide for the valuation of the business at the time of a divorce and resolve any potential issues regarding the division of property. Doing so in advance helps determine whether any part of the business is marital property and which, if any, parts are separate property.
If the courts get involved, all aspects of the business are considered in equitable distribution, play a role in the paying of alimony or spousal support, and have a part to play in child support. The latter two are calculated based on each partner’s income, and ownership stakes in a business make a big difference. It is important to keep detailed financial records of each spouse’s involvement in the business and make sure that all ownership interests and terms of contract employment and formal employment are kept in writing and immaculately detailed.
When all of this is considered, having a detailed prenup or postnuptial agreement in place can save a great deal of time, expense, and trouble. The agreement will allow for an easy split of the property based on prearranged terms.
These types of agreements can be drafted with the help of a qualified and experienced Northern Virginia divorce lawyer at Melone Hatley, P.C. A family law attorney will help make sure that every split is fair and your interests are represented.
If you are facing a contentious divorce and you feel like your business is in danger, you do not have to fight alone. The experienced divorce lawyers at Melone Hatley, P.C. are ready to fight with you to protect your interests. We will help you fight for what is yours. Just give us a call. Our phone number is 800.479.8124 . You can also use our online contact form.
We are pleased to offer legal advice, free e-books, advice videos, and a caring attorney-client relationship. We put our clients first in all things, and we’ll fight for you and your Fairfax or Loudoun County business. Reach out today to speak with a member of our legal team.
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