Ways to Handle a Business when You are Divorcing
Guiding Couples in Divorce with Business related issues in Brick, Sea Girt, Toms River, Wall, and across Ocean and Monmouth Counties.
Who gets what in a divorce is what divorce is all about. Divorcing parties must agree on how much each gets of the bank accounts, house, investments, retirement, insurance, support, and debts. Even time with the kids is about how much each gets and is entitled to. After figuring out who owns what, the divorcing couple, or, if they cannot agree, the judge has many options to divide the assets and debts, allot time with the kids, and provide support to the spouse in need of it. But when it comes to separating the interests of one or both parties’ business, there are limited options: buyout, sale, or co-ownership. None of these options may be optimal, but divorce is often a compromise for the best of the less-than-ideal choices.
Before considering the choices, divorcing spouses must determine who owns the business. That may be a simple or complex question. The answer is heavily based on when the business began. If one spouse purchased or created the business before marriage, it could be separate property of that spouse. But even if the business arose during the marriage, one spouse can have a larger interest in the business than the other, so much so that a court may award the business to that party. For example, the spouse who bought an ice cream store with a large inheritance during the marriage may own the property. Though businesses acquired or started during the marriage are presumed marital property, the source of funds, in this case, is separate property. Inheritances belong to the party inheriting unless they commingle the funds with marital property. But if both spouses worked in the business, there may be a separate and community interest in the business, or the court may consider the business a gift to the marriage and, therefore, marital property.
At Bronzino Law Firm, LLC we can help you manage your divorce as we take the proper steps towards protecting your business. To schedule a free and confidential consultation today regarding your specific case, please send us a message or call (732) 812-3102. When you need a legal advocate on your side, you can place your trust in us.
What Should I Do After Settling the Business Ownership Interest?
After settling the business ownership interest of each party, the dollar amount attributed to each interest is vital. To evaluate the business, the parties can agree on a value or let a licensed business valuation expert evaluate the business. Each can also hire their own appraiser as evidence at trial if they cannot agree. An expert can evaluate the business based on its assets, fair market value, or income. The approach depends on the type of business, commercial or professional, for example, and the size and complexity of the business. Establishing the value of the business, the parties can then decide what they want to do with it.
If possible, one party might want to buy the other out. This might be the best solution for the party that primarily invested time and money into the business. Say, one party is a licensed contractor who started and ran a construction company during the marriage while the other worked as a nurse at a hospital. If the contractor plans to stay in the area and continue working the business, they may buy out the nurse with a lump sum payment or installment payments over time, based on the value of the business. Alternatively, the contractor could trade other assets for the business. Perhaps the nurse has a sizable retirement that is a marital asset equaling the value of the business. If the construction business owner and operator keep their business and the nurse maintains the retirement, each could keep their own marital asset acquired through their labor.
Consider Tax Ramifications
One important consideration in any asset trade is tax ramifications. Fortunately, transfers between divorcing spouses are typically non-taxable if the transaction occurs within a year to six years of the divorce, depending on the circumstances. Neither party ends up with a tax burden due to the transferring of ownership interests. So, if the family residence is transferred to the nurse so that the contractor can keep their business, the nurse does not get a huge tax bill when they sell the property because the transfer was made in the context of a divorce. Taxes must be factored into any buyout based on asset transfers to ensure the division of assets is equitable.
Aside from taxes, other hidden complications exist for each of the three private business division options in divorce. For example, selling a business and splitting the sale proceeds seems like a fair and simple solution after the divorcing parties evaluate the business, especially if one party cannot buy the other out for lack of funds or sufficient property to offset the buyout. The solution often works for family residences, but businesses differ from real property in significant ways. While both real property and a business suffer from price fluctuations due to the economy or other influences, a business may not be marketable the way a house is. The need for a house is more common than the need for a shop or a medical practice. Not only is the market slimmer for business sales, but each business may have specific limitations, like licenses that only the business owner can use, low profits, employee scarcity for specialized businesses, and other conditions that make the business unmarketable. As such, a sale could take a long time. The parties then must come up with a division of labor and money during the sale. And even if the business has offered, the parties may not agree on which to take and need court assistance.
The final option may be to co-own the business after the divorce.
This is usually the least favored option by divorcing parties and courts. Even though some divorces are not contentious, sharing a business after divorce can cause contention, even if the parties agree in writing that one party will run the business. The other will receive a percentage of the profits until the non-operating party’s interest is satisfied. It is not hard to imagine disagreements arising over how the business is run when one party stands to lose their interest in the business if it goes under. And the risk of the business failing is one pitfall to co-ownership. Of course, a business can increase in value after the divorce too. So, each party risks gain or loss if the business is valued at divorce but decreases or increases in value afterward.
Within these three ways to divide a private business, there are many variables and creative solutions the parties can work out. Most average people are not knowledgeable enough about the law and business division in New Jersey to come up with the best solution for their circumstances or to ensure that such an outcome is reached, whether through negotiation or litigation in court. For that reason, most people hire an attorney, preferably a divorce and family lawyer with extensive experience handling divorces where business and equitable distribution of property is at issue.
Handling business buy-outs, sales, or co-ownership in divorce with help from an Ocean and Monmouth County Attorney
If you own a business and are getting a divorce, your best option is to engage a family law attorney with a business background to represent you. If you reside in Neptune, Wall, Manasquan, Point Pleasant, Brick, Jackson, Sea Girt, Ocean, and all of Monmouth County Area, attorney Peter J. Bronzino can help you craft a customized business division solution or advocate and support your desired solution to the business division.