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Divorce is never easy, but when you own a business, the stakes are often even higher. As a business owner, you’ve likely invested time, effort, and financial resources into growing your company, so protecting those assets during a divorce is crucial. While divorce laws vary by state, there are key factors every business owner should understand about how divorce may impact their business.
In this blog, we’ll walk through what you need to know to help safeguard your business during the divorce process. We’ll cover how businesses are treated in divorce, ways to protect your assets, and the options available if your spouse has an interest in the business!
1. How Is a Business Treated in a Divorce?
When it comes to divorce, your business can be considered an asset, just like your home, retirement accounts, or other investments.
In many states, including Georgia, this means that a business started or grown during the marriage could be subject to division, especially if marital funds were used to support it.
Key Factors Courts Consider:
- When the business was started: If the business was established before your marriage, it may be treated as separate property. However, any appreciation in value during the marriage could be considered marital property.
- Contribution of marital assets: If both spouses invested time, money, or other resources into the business, a court may decide that the business should be part of the marital property pool.
- Spousal involvement: If your spouse was involved in the day-to-day operations or contributed indirectly by supporting you while you grew the business, this can influence how the court views their entitlement.
If the business is considered marital property, it doesn’t necessarily mean it will be split 50/50. Courts take a variety of factors into account, such as each spouse’s contributions and other assets. That said, it’s essential to take proactive steps to protect your business as early as possible.
2. Steps to Protect Your Business
While it’s never pleasant to think about divorce, business owners should always consider long-term strategies to protect their assets. Fortunately, there are several ways to help safeguard your business if a divorce is on the horizon or to future-proof it against potential division.
Pre- or Postnuptial Agreements:
One of the most effective ways to shield your business is through a prenuptial or postnuptial agreement. These agreements allow you to specify that your business is separate property and not subject to division during a divorce. If you’re already married and didn’t have a prenup, a postnup can still help clarify business ownership.
Shareholder Agreements:
A shareholder agreement can shield your business from division in a divorce if it has multiple owners. These agreements often include a clause that restricts an owner’s spouse from receiving a share of the business in a divorce settlement.
Paying Yourself a Salary:
If your business income supports the household, make sure you’re paying yourself a regular salary rather than reinvesting all the profits back into the business. Failure to do so may give the impression that your spouse has a right to share in the company’s profits.
Separate Accounts:
Maintaining clear boundaries between personal and business finances is essential. Keep personal expenses separate from business accounts to avoid confusion about whether marital assets are being used to fund the business.
By putting these protective measures in place early on, you can potentially avoid the stress of having your business evaluated and divided during a divorce.
3. Valuing the Business: What Happens When It’s Considered Marital Property?
If your business is considered marital property, one of the first steps in a divorce is determining its value. This can be a complex process, and it’s important to work with professionals who understand the nuances of business valuation. There are several methods a court might use to assess the value of your business.
Business Valuation Methods:
- Asset-based approach: This method looks at the total value of the business’s assets minus any liabilities.
- Income-based approach: Here, a valuation expert assesses the business’s ability to generate future income, often based on past earnings.
- Market-based approach: This compares your business to similar businesses that have recently been sold.
Once a value is established, the next question is how that value will be divided. If your spouse has a stake in the business, they may receive a portion of its value, even if they don’t get direct ownership.
4. Options When Your Spouse Has an Interest in the Business
Even when a business is considered marital property, it doesn’t always mean the company will be split between both spouses. There are various options for handling business interests in a divorce that can help preserve the company while ensuring a fair settlement for both parties.
- Buyouts: A common resolution where the business owner buys out their spouse’s interest, providing a fair settlement while keeping the business intact.
- Structured Payments: When a lump sum buyout isn’t feasible, courts may allow payments over time, enabling the business owner to retain control while compensating their spouse.
- Trading Other Assets: One spouse may trade assets like the family home in exchange for waiving interest in the business, allowing both to prioritize their financial futures.
- Partitioning the Business: In some cases, a business may be physically partitioned, dividing ownership, operations, or assets between spouses. This approach can ensure both parties retain control of separate parts of the business while minimizing disruption to its operation.
- Continued Co-Ownership: Less common, but some couples opt to co-own the business post-divorce, particularly if both were involved in daily operations.
Moving Forward: Get the Right Legal Guidance
Divorce is tough, but protecting your business doesn’t have to be overwhelming. By understanding how businesses are treated in divorce and the steps you can take to safeguard your assets, you can more confidently navigate the process, but you still shouldn’t do it on your own! If you’re a business owner going through a divorce, working with the right legal team can make all the difference.
At Washington Legal Group, we are unique among law firms in Atlanta, GA, that practice both family and business law, making us the best choice for divorcing couples who own businesses. Contact us today for a free consultation and take the first step toward securing your financial future.
