Family business enterprises are uniquely vulnerable in that family problems can impact both the family and the business. For spouses who own and operate a business in Arizona, divorce will have direct and indirect consequences. Both on the enterprise and on their personal lives.
It’s important that you start by speaking with an experienced Phoenix divorce lawyer who can help you determine what you’re legally entitled to receive regarding the business in the divorce settlements. You never want to be in a situation where you wish you had gotten legal advice sooner than you did.
We also have a blog post on what happens in a divorce if one spouse owns a business.
What Happens to The Business if The Owner Gets Divorced?
It’s common for a business to be divided equally between the two spouses during a divorce. First, the same marital property division laws in Arizona that determine “who gets the house and who gets the condo” generally apply to sole proprietorships, corporations, limited liability companies, and partnerships. Second, a spouse’s income from the business is a key factor in establishing child support as well as spousal maintenance.
How Are Business Assets Divided In Divorce?
Generally, marital business assets are to be divided equally in a divorce. As with all other assets and debts, separate property belongs to one spouse while community property is owned 50/50 by both spouses.
Whether it’s a coffee shop, retail store, or professional practice, there are specific steps to take in preparation for distribution. How business assets get divided in your divorce will depend upon valuation and the portion attributable to the community.
When a Business Is Community Property?
Many spouses jointly own businesses, from multi-million dollar operations to pop-up shops. In other marriages, one spouse may own the business interest, but the other spouse still has community property rights to it.
For the party who started the company before marrying or who purchased it from separate funds, the challenge is arriving at a fair and reasoned determination of the community component of the business. Do not rely on balance sheets, those do not show the fair market value of a private business. Also, be sure the valuation report you use to negotiate terms reflects the company’s current status. Do not rely on outdated reports from two or three years ago.
How to Protect Your Business in a Divorce
As Phoenix divorce attorneys, we routinely utilize the services of forensic accountants or CPAs to sift through company reports, earnings statements, tax filings, loan documents, and so on. These professionals use standardized valuation methods to investigate, analyze data, and make conclusions.
Do you suspect the other spouse “cooked the books”? A forensic accountant can conduct a lifestyle analysis when a business owner appears to be spending more than he or she claims to be earning.
Parties can agree to hire a specific expert or each may hire an accountant in what could become a battle of experts. Whether you own a restaurant or car dealership, we encourage you to take the business valuation process very seriously.
Once the parties have an actual valuation for the company, they can begin settlement negotiations in earnest with their attorney’s assistance.
Ownership Interests in Partnerships and LLCs
Marital dissolution could impact the continuity and profitability of a partnership or limited liability company on many levels.
Types of questions that should be asked and answered when dealing with complex business property divisions:
- Are spouses the only business partners?
- Will the LLC need to be dissolved?
- Can one spouse transfer his or her share to the other spouse?
Consider a private medical practice. There may be several doctors – partners or members of a professional LLC – who draw salaries while sharing profits and losses.
Partnership agreements typically include anti-assignment provisions, meaning a partner cannot assign his or her interest in the business to a third party, such as the other spouse in a divorce. And LLC business owners would include a similar provision in their operating agreement. However, a partnership agreement may allow assignment of the partner’s right to distributions to someone who is not a partner. In that instance, a partner could assign the right to distribution to a former spouse as part of a separation agreement.
Business Partner is Getting a Divorce
Is another partner at the firm divorcing? Consult a competent attorney with the news, “my business partner is getting a divorce.” Find out specifically how this situation could impact the organization presently and in the future. Ask what actions can be taken to protect business assets and reduce exposure to liability. Even though you might not be the one getting a divorce, you’re business (and you) will likely be impacted by your partner’s marital dissolution.
Business Income and Support Obligations
What if the business is the sole and separate property of one spouse? Even if this were so, the closely held business would still be a source of income. And income is relevant to support.
The Arizona Child Support Guidelines require the inclusion of parental income from any and all sources. This includes profits, salaries, and perquisites from a family-owned business.
Importantly, the income of the parent after the division of marital property may be less because he or she no longer owns a portion of the business. A problem for many business owners is double-dipping.
What is The Double-Dip?
When a business is divided in a divorce, income the party receives from it is correspondingly reduced, too. Double-dipping happens when child support or spousal maintenance obligations are calculated based on the party’s income before the property division took place.
Consider an example. One spouse earned $200,000 a year from the family ranch in the three years preceding divorce. In their property settlement, they agreed to divide the ranch in half and go their separate ways. Now the same spouse expects to earn $100,000 a year, maybe less. To avoid being unfairly burdened, child support calculations should reflect the reduction in gross income.
Likewise, spousal maintenance calculations based on the income from the business before it was divided could unfairly enrich the recipient spouse or vice versa. Talk to your attorney about the importance of avoiding the unfair consequences of double-dipping. The issue can be addressed during negotiations and mediation, or at trial if necessary.
Negotiate a Business Friendly Property Settlement
Many spouses negotiate a family-friendly property settlement that helps the business continue, even thrive, long after the divorce decree is entered. Why? Because it is mutually beneficial. That is not true of all spouses, though.
Without getting into day-to-day operations, consider the following negotiable points:
- What arrangement allows the business to continue operating and expanding after the divorce?
- Will one spouse transfer his or her ownership interest to the other? If so, is that in exchange for cash, equalization payments over time, a greater portion of the other’s retirement fund, maintenance, the marital home?
- With a family business, will the parties continue operating their company as partners after the divorce? This may look good on paper, yet not be a good plan emotionally. A clean break may be what’s needed to move on with life.
- Will spouses sell the business outright and divide the proceeds?
- Can two entities spring from the original? Would one operation be a subsidiary of the parent company?
- Are individual earnings after divorce expected to be more, less, or equal to what was earned from the business prior to divorce?
Get Help With Dividing Your Business in A Divorce
What works for one person, or one business, in a divorce will not necessarily work for another. Do some soul-searching. Do you want to carry on operating the business without the other spouse? Can you?
Get an accurate valuation for the business and all other property in the marital estate. Think about future income generation and your ability to meet family support obligations. Go over your concerns and financial requirements with an Arizona divorce attorney who has complex property division and litigation experience.