If you and/or your spouse own shares in a family business and are going through a divorce, it is essential to understand all of the legal implications that may affect you and any possible impacts of that stake.
Business Assets and Liabilities: Marital or Separate?
As part of your divorce plan, the first step should be identifying which assets and liabilities belong to marital property and which ones should remain separate property. Typically speaking, businesses established during marriage should be treated as marital assets which will need to be divided among both partners in a divorce proceeding; otherwise they should typically be seen as separate property where one party will likely retain sole ownership of it.
At times, it can be unclear which property belongs to whom. Sometimes one spouse may own the business prior to marriage but see its value increase during marriage due to contributions made by both. Example: you and your spouse could have invested marital funds towards expanding a business owned by one spouse; conversely, the value of one of their businesses could have increased due to contributions by their other partner; for instance when working at their business helped expand its customer base. In such instances, an increase in business value may be considered a marital asset. A court could determine that one spouse owns part of it while the other does not or could order reimbursement to both partners for contributions made during the marriage to it by one partner or vice versa.
Note that in certain circumstances a business founded during a couple’s marriage may still be considered separate property. Assets acquired in exchange for non-marital assets will usually not count as marital property – this applies if one of you used inheritance funds from family members to start up the venture, or saved money before marriage was invested into starting one – these factors could make the business separate property rather than marital.
Establishing the Value of a Family Business
No matter whether it falls under marital or separate property categories, it’s crucial that both spouses understand the current and future value of any businesses they co-own in order to determine how assets should be divided during divorce proceedings. Even if one partner owns all or most of an asset individually, having knowledge of its worth ensures both know about all available financial resources that might help determine decisions regarding property division or spousal/child support issues during a separation or divorce proceeding.
For your own peace of mind and to ensure a full understanding of a family business’s current and future value, conducting a valuation during your divorce proceedings may be necessary. The business valuation process typically involves an independent third-party conducting an extensive analysis to ascertain both its current monetary value and projected future worth. An expert financial consultant can assess business records, analyze market trends, assess customer relationships and any other relevant factors that could alter its value. By doing this, both you and your spouse can gain a clear understanding of how much the business is worth, its potential benefits to those who remain as owners, and any costs or liabilities associated with business ownership.
Option for Dividing a Family Business
Once the value of the family business has been determined, there are various strategies you and your spouse may employ when dividing its assets during a divorce proceeding. One option could involve one spouse purchasing out the other’s interest in exchange for their ownership stake in the business; or alternatively trading other marital property against it to buyout their share over time.
If the continuation of ownership by either party will no longer be feasible, selling your family business may be one option during your divorce proceedings. By determining its market value and selling it at a profit to a new buyer, you could potentially see a substantial return on investment that can then be divided among both you and your spouse as marital assets.
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