Small Businesses & Divorce in Michigan
If you own and operate a small business, are part of a family business or are a contractor/employee that is required to use an LLC, then you should be concerned about getting a divorce in Michigan.
The main reason is that the business or some portion of it will be considered marital property and you will have to pay your spouse half of the value of the company as determined by a business evaluation or appraisal. The best way to avoid this issue is to have a prenuptial agreement to protect your interest in the business or LLC in the event of divorce, separation or death. However, if you do not have a prenuptial agreement, there are still steps that you can take to limit the damage as much as possible.
How are Small Businesses, LLC’s & Family Businesses Handled in Michigan Divorce Cases?
If you run a small business that you started or are part of a family business, then most likely the court will find that at least some portion if not all of the business is marital property. This is true whether your spouse worked at the business or even had anything to do with the business during the marriage, they gain the interest by virtue of being married to you. If there is any growth in the business at all, then that growth will be subject to an equal division.
Unfortunately, there are many businesses that have no sellable value or actual value that will be considered to have a value in the event of a divorce. One of the big problems for the business owner is that the Michigan divorce courts or family law courts, have decided that an appraisal based upon the “holder’s interest” in the company is the appropriate way to value a business in most cases. This means that while the business may not have value to anyone other than the person that runs the business, the expert who values the business may put a value on it based upon the worth that it has to the person running the business.
The evaluator will look at the income that it has generated for that person over time, then determine what income a business would pay the person to do the job (manage the business, sales, whatever it is the owner actually does to generate the income) which is always lower than what the owner is earning and then add the difference between the two back into the business. This then increases the value of the business and can take a business that has little or no value and make it appear to have a value of several thousand dollars to several hundred thousands of dollars depending upon the evaluation.
This fictional value will be used to force the business owner to pay to the other spouse half of this fictional value from other assets. The only positive on the flip side is that the reduced income used to value the business will be used for calculating alimony, however the actual income will be still be used for child support.
How Michigan Divorce Can Affect Your Business
Here is a simple example that shows how patently unfair this can be to a “business owner”. In this example Rachel is a sales person that travels around the country to boat shows selling boats for her employer, WindSails. WindSails is her only employer but WindSails, for a variety of reasons, does not want to hire her as an employee but instead as a captive but independent contractor and requires that she set up a limited liability company and it will pay her sales generated commission into the LLC.
She therefore opens up “RachelSells, LLC” and earns approximately $250,000 in sales commissions for the next five years. Then her husband unexpectedly files for divorce because he does not like that she is gone every weekend working. The business evaluator looks at the numbers and determines that the national average income for a boat salesperson is $50,000. After adding back in the difference between her actual income and the national average ($200,000 per year for five years), the evaluator comes up with a value of $360,000 for the LLC and the husband’s attorney argues that Rachel has to pay her husband $180,000 to him for the “value” of her business.
The above example shows that while it is clear there is no actual value to RachelSells, LLC – it has no assets, no client lists, no inventory; it is in all reality just a different way for an employer to pay its employee, the court very well may treat it as an asset that has significant worth and she may leave the marriage with nothing but the LLC while her husband is awarded the rest of the assets to offset this value.
There are two lessons from this: one – if you own or run any type of small business it is important to get a good business evaluator on the case as soon as possible, while you will still have to pay something for the value of the business, there is still quite a bit of damage control that can be performed given enough time (however, it always increases the costs of the divorce as well); two – while prenuptials are always a good idea when one gets married, if you own or operate a small or closely-held business in any way, a prenuptial agreement is essential.
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