One of the most complicated and emotionally charged facets of a divorce is the division of assets. If a spouse owns a business, several factors will come into play when determining distribution and whether the non-owning spouse must be equitably compensated. Often, the first question divorcing spouses have is: Who gets the business in a divorce?
If you are in the process of a divorce and one or both of you own a business, it’s important to understand how this asset is treated and the potential outcomes for both spouses.
If your spouse owns a business, you may be entitled to partial ownership or to half of the business’s value. Alabama is an equitable distribution state, which means that assets are distributed in a way that’s fair and equitable. Fair and equitable doesn’t necessarily mean 50/50.
Ultimately, it depends on whether the business is considered marital or separate property.
Even if the business was started prior to the marriage, it can still be classified as marital property if:
If you are in the process of a divorce and your spouse owns a business, it is crucial to have a knowledgeable business divorce attorney on your side. The ownership of a business complicates the divorce process.
If one or both divorcing spouses owns a business, a business valuation will be performed to determine:
These figures will come into play when making property division and child support decisions.
The valuation process should be handled by a business valuator, such as a forensic accountant, to ensure accuracy.
A variety of factors will be taken into account when valuing the business, including industry, financial disclosures, tangible and intangible assets, cash flow and other factors.
In Alabama, the most commonly used standard of value is Fair Value.
Fair market value determines the value of the business if it was sold “today” without pressure to sell or pressure from the buyer to buy. The value is determined using valuation of similar businesses or using one of many methods:
Because Alabama is an equitable distribution state, the court will consider many factors when determining whether the business is marital property and if so, how it should be distributed.
While every case is different, these are the most plausible scenarios for the division of a business:
Typically, the court will award the business to one spouse. However, determining how much to compensate the other spouse can be complex. The valuation of the business will play a role in determining what “equitable compensation” means in this case.
Business owners may consider selling their business before they start the divorce process, but what are the legal ramifications? If you own the business outright, you can sell it prior to a divorce.
If the sale is to prevent the other spouse from receiving their share of the asset, it may backfire. The sale of the business and its proceeds will – in most cases – need to be declared to the court.
You’re free to sell the business, yet if the court finds that your spouse had equity in the business, they will need to be made whole.
If a spouse sells a business before a divorce and tries to hide the money from the sale, this is when major problems arise. Concealing assets can lead to:
Judges do not take kindly to anyone hiding assets or money in a divorce.
If a pre- or postnuptial agreement is drafted, a business can be kept out of divorce proceedings. Partnerships often require an agreement to be in place when any partner marries to safeguard the company.
When no agreement is in place and the business was founded before the marriage, the asset may or may not be subject to division. First, we’ll need to establish if the business is a marital asset or a separately owned asset.
By default, a business that was owned prior to marriage is not subject to property division. However, if any of the following occurred, then the court may decide on division:
Since a thriving business will have likely enriched a marriage to some degree, it is likely to be divided to some degree if a pre- or postnuptial agreement isn’t in place. Alabama’s laws do not require businesses to be split down the middle, but division will vary on a case-by-case basis.
Negotiations can take place, allowing you to:
If both parties are willing to compromise, there’s a good chance the managing partner will be able to keep the business. Spouses who have a non-managing role in the company are often satisfied with the share of the company in cash or with assets equaling the share’s value.
Who gets the business in a divorce? A lot of factors must be considered before giving you an answer. If your business was founded before the marriage or during it, division rules will vary. Your best bet is to contact a divorce attorney who will review your circumstances and help you better understand your options.
Contact us today at (256) 736-8744 to speak to a business divorce attorney in Cullman, Blount, Morgan or Winston counties, or fill out the form below.