Deciding what to do with your family business when getting a divorce can be complicated, especially if you and your spouse have active roles in it. Not only might the company generate the bulk of your and your spouse’s income, but it could also employ many other people. Unfortunately, although the business’s survival may be important, keeping it running may be difficult. Countless small businesses have crumbled when the married owners split up and went their separate ways.
Below, we’ll cover several aspects of dissolving a marriage while ensuring a family business stays afloat. We’ll begin with a few basic questions you and your soon-to-be ex should ask yourselves.
Questions To Ask Yourself About The Business
The first question to ask is whether you and your spouse want to retain ownership of the business, or sell it and split the proceeds. Both options lead to additional questions.
For example, suppose one or both of you want to retain ownership. Do you and your spouse intend to continue working together following the divorce? If one person wants out of the business, will the remaining party buy him or her out? Are the funds available to do so?
Suppose you both agree to sell the business. There will be taxes due on the profit when the sale is complete. The business’s structure – LLC, partnership, S corporation, etc. – will dictate the rate at which the profit will be taxed.
On Having The Business Professionally Appraised
In order to move forward with either plan – i.e. to keep the business or sell it – you need to know how much it is worth. This is not the time to guess. Hire an appraiser who can determine your company’s value based on revenue, assets, liabilities, and other criteria.
It’s not uncommon for both parties in a divorce to hire their own appraisers. This is likely to result in different valuations, since different approaches may be used. But the difference between the valuations should be minimal.
Once you know how much your company is worth, you and your spouse can make rational decisions about its future. You’ll also be able to determine whether either of you has the funds available to buy the other person out.
Income Versus Property: Which Is Your Business?
When splitting the value of your company between you and your spouse, it’s important to decide whether it should be considered income or property. The designation you choose could have an effect on the amount you pay in spousal support (if any).
When a business is classified as income, the proceeds from its sale can be included in the calculation for spousal support. If that same business is considered to be property, the proceeds are not used when calculating support.
Consider the following scenario: suppose you designate your business as income, and the laws in your state dictate that your spouse is entitled to half. Suppose further that your spouse is entitled to alimony. In addition to forfeiting half your company, you may also need to pay spousal support based, in part, on your company’s valuation. In such a case, your ex-spouse would have an opportunity to “double dip.”
Leaving The Decision Up To The Divorce Court
One of the worst decisions you can make is to allow the divorce court judge to decide how to address the division of your company. Even if the judge has experience in such cases, he or she is unlikely to fully understand the nuances and factors that contribute to your company’s value. The judge will likely rely on financial statements and tax returns, the use of which may only scratch the surface in assigning an accurate valuation.
If you or your spouse wants out of the business, and the other party is unable to produce the funds for a buyout, the court may force an immediate sale. Other financing options, such as paying a certain percentage of profits each month, may not even be considered.
The best approach to seeking a divorce when running a family business is to negotiate a settlement with your spouse. This may require mediation, arbitration, and the help of experienced divorce attorneys. The benefit is that you’ll have a much bigger say in what might be your most substantial asset.