Starting and running a small business is tough enough. The domestic issue in the forefront of your mind is how the stress of running a business will affect the relationship of your marriage. However, you might want to consider how your marriage affects the assets of your business and understand how a divorce could affect the future of your business.
In this three part post, I highlight some of the issues that arise in a divorce which includes a business owned by one or both parties. Because of the complex nature of this type of divorce, it is difficult to cover all of the issues involved. However, these posts will help to provide some understanding of the basic considerations.
What is Marital Property?
- A marital estate includes all assets and debts acquired during the marriage (i.e. the date of marriage to the date of separation) as well as any pre-marital assets that have increased in value during the marriage or any assets acquired post-separation that were acquired with marital assets.
What is not Marital Property?
- Premarital property but for the increase in the premarital property during the marriage.
- Gifts from third parties.
- Inheritance, unless it is co-mingled with the marital estate and except for the increase in inherited property during the marriage.
- Property excluded by agreement of the parties. These exclusions can be from a premarital/prenuptial agreement or a marital agreement.
Marital Property and Small Business
When a business is established prior to the date of marriage, the marital property portion of your business equals the increase in value during the marriage (i.e. the date of marriage to the date of separation). When a business is established during the marriage, the marital property portion of the business is equal to 100% of the value of the business. These concepts also apply to your percentage share of a business owned with other individuals.
Understanding Business Valuations for Divorce Purposes
In the case of a business being established prior to marriage, the value is equal to the current value (date of distribution) less the premarital value.
Value = Current Value - The Premarital Value
For purposes of divorce litigation/negotiation, a business is typically valued by a certified business appraiser or certified public accountant. Some of the factors considered by the business appraiser when valuing your business include:
- Type of Entity
- Income Generated
- Assets and Inventory
- Debt Load
- Good Will
- Market Conditions
- Real Estate - often requires a real estate appraisal done separately from the certified business appraisal.