How Businesses Are Treated in Divorce Actions
September 14th, 2016 by CLLB Law
Discussions about divorce often center around two topics: children and property. For many small business owners, the line between those two subjects is blurry and the worries are similar. After all, building a successful business takes a lot of heart, sweat, time, dedication, and patience. When the uncertainty of divorce looms large, it’s common to wonder what will happen to your business. Most notably, how much will you have to share? Is my soon to be ex-spouse entitled to half? And, as with many legal questions, the answer is: it depends.
First, it matters exactly when the business began. If it was started before the marriage, then its value at the time of marriage is separate property that belongs to the entrepreneurial spouse. However, any increase in the business’s value between the marriage and the date of separation is marital property that must be included as part of the assets that have to be divided. The same goes for any business started after the marriage.
Second, it matters where you live. Nine states follow community property rules, which dictate that assets acquired during the marriage are split down the middle in a divorce. Indiana and Kentucky side with the majority of states that follow equitable distribution rules, which direct that assets obtained during the marriage should be divided fairly. Although this is not the same as equally, some divisions are 50/50. In determining how to divide marital property, a court may consider:
- The financial condition and earning power of each spouse
- The value of each spouse’s separate property
- The degree to which each spouse contributed to acquiring marital property
- The degree to which each spouse contributed to the education and earning power of the other spouse
- Future financial needs of each spouse
- Financial liabilities of each spouse
- The ages and overall health of each spouse.
Third, the value of the business must be established. This is a complex calculation that must address tangible assets such as bank accounts, inventory, machinery, and buildings, as well as intangible assets like patents, mortgages, leases, accounts receivable, and goodwill. Both enterprise goodwill (results from the business having established relationships with customers, employees, and suppliers) and personal goodwill (results from the continued existence of a particular person associated with the business) are taken into account. Valuation drives property distribution, so it’s important to have a knowledgeable appraiser involved.
Finally, what happens if it is your business partner going through a divorce? What happens to his or her interests and voting rights? Many of these issues can be resolved with well thought-out, strategic planning before a tragedy occurs. If your business has not planned for these contingencies, you should speak with an Indiana business and succession planning lawyer who can protect your interests and plan ahead for what will happen within the business if you or your partner find yourselves in a divorce.
These few concepts are the most basic when it comes to businesses as assets in divorce actions. This can be a very challenging issue that grapples with questions of controlling interests, marketability, double-dipping, and more. Because it is an extremely fact-dependent legal action, you should speak with an Indiana divorce and/or business lawyer who can represent your interests and make the process go as smoothly as possible.
If you have any questions about this topic, you can find out more by discussing it with one of the attorneys at Church, Langdon, Lopp, Banet Law. We have years of experience helping people, and we can help you. Based in New Albany, Indiana, we proudly serve communities throughout Kentuckiana including, but not limited to, Jefferson County, KY; Floyd County, IN; Clark County, IN; and Harrison County, Indiana. For skilled representation, contact us by calling (812) 725-8224 or by using our online form.