Divorce is never simple, but when you own a small business, the complexity increases significantly. Your business isn’t just your livelihood—it’s an asset that must be addressed during the divorce process. You may even be holding off filing for divorce because of the unknown impact to you business. Understanding how divorce impacts your business and what steps you need to take can help protect both your financial future and the enterprise you’ve worked so hard to build.

Business Valuation: The Critical First Step

One of the most contentious issues in a divorce involving a small business is determining its value. Unlike publicly traded companies with readily available stock prices, small businesses require professional valuation. This process considers multiple factors including revenue, assets, debts, market conditions, and future earning potential.

Be prepared for your spouse to hire their own valuation expert. Discrepancies between valuations are common and may require negotiation or even court intervention to resolve. The timing of the valuation also matters—market conditions and business performance can fluctuate, making the valuation date a potential point of negotiation.

Separate vs. Marital Property

Whether your business is considered separate or marital property depends largely on when and how it was established. If you started the business before marriage using only premarital funds, it may be considered separate property in some states. However, if your spouse contributed to the business—whether through direct work, financial investment, or even indirect support like managing household duties while you built the company—they may have a claim to a portion of its value.

Even businesses started before marriage can become marital property if marital funds were used to grow or sustain the business, or if your spouse actively participated in its operations. The lines can blur quickly, making legal guidance essential.

Division Options: What Happens to Your Business?

When it comes to dividing business interests in divorce, several options typically emerge:

Buyout: One spouse buys out the other’s interest in the business. This allows you to retain full ownership and control, but requires sufficient liquid assets or financing to compensate your spouse for their share.

Co-ownership: Both spouses continue to own the business together after divorce. While this can work for some couples who maintain an amicable relationship and strong business partnership, it’s relatively rare and requires exceptional communication and trust.

Sale: The business is sold and the proceeds are divided. This is often the simplest solution financially, but it means losing the business you built. For many entrepreneurs, this is the least desirable option.

Trade-off: One spouse keeps the business while the other receives assets of comparable value, such as real estate, retirement accounts, or other investments.

Protecting Your Business Interest In Divorce

If you’re heading toward divorce, taking proactive steps can help protect your business:

• Gather comprehensive financial records. Compile tax returns, profit and loss statements, balance sheets, and bank statements for at least the past three years. Complete and accurate financial documentation is crucial for valuation and negotiation.
• Maintain separate finances. If possible, keep business and personal finances strictly separate. Commingling funds can strengthen your spouse’s claim to business assets and complicate the division process.
• Consider cash flow carefully. Courts may award spousal support based on your income, including business income. Be prepared to provide detailed information about how much you actually take home versus what the business earns.
• Don’t hide assets. Attempting to conceal business income or assets is illegal and can result in severe penalties, including contempt of court charges. Courts take a dim view of financial dishonesty, and the consequences can be far worse than an equitable division of assets.

The Role of Prenuptial and Postnuptial Agreements

If you owned a business before marriage or started one during the marriage, a prenuptial or postnuptial agreement can be invaluable. These agreements can clearly define the business as separate property and establish what happens to it in the event of divorce. While it may be too late for a prenuptial agreement if you’re already facing divorce, understanding their importance can protect any future business ventures.

Tax Implications

Divorce and business division carry significant tax consequences. Transferring business interests between spouses, restructuring ownership, or selling the business can all trigger tax events. Working with both a family law attorney and a tax professional is essential to minimize tax liability and structure any transfers or buyouts in the most tax-efficient manner possible.

Impact of Divorce on Business Operations

Don’t underestimate the practical impact divorce can have on your business operations. The emotional strain, time commitment, and financial resources required for divorce proceedings can distract you from running your business effectively. Additionally, if divorce proceedings become public or contentious, they could affect business relationships with clients, vendors, or partners.

Consider whether you need to inform business partners or key stakeholders about your divorce, especially if it might affect business operations or ownership structure. Transparency with business partners is often legally required and can help maintain trust during a difficult time.

Working with the Right Professionals

Divorce involving a small business requires a team approach. You’ll need:

• A knowledgeable family law attorney who understands business valuation and complex asset division
• A business valuation expert who can provide a credible assessment of your company’s worth
• A forensic accountant if there are concerns about hidden assets or income
• A tax advisor to help navigate the tax implications of any business transfers or restructuring
• A financial planner to help you understand the long-term implications of different settlement options
  Moving Forward

Divorce is undoubtedly one of life’s most challenging transitions, and when a business is involved, the stakes are even higher. However, with proper planning, experienced legal representation, and a clear understanding of your options, you can protect your business interests while achieving a fair resolution.

At The Mitten Law Firm, we understand the unique challenges small business owners face during divorce. We provide the individualized attention and personalized focus needed to navigate complex asset division while protecting your financial future. Our goal is to work with you to efficiently and effectively resolve these legal hurdles, allowing you to move forward with confidence.

If you’re a business owner facing divorce, don’t wait to seek legal counsel. The decisions you make early in the process can have lasting implications for both your business and your financial future. Contact us today to discuss your situation and explore your options.