A business owned by a married individual may be a family’s main source of income. It is also a valuable asset in addition to being a source of revenue. As an asset, it is potentially vulnerable to division when the owner divorces.
Some business owners and professionals who run their own professional practices assume that they can claim their businesses as separate property because they hold them solely in their own names. However, there are many scenarios in which businesses may actually be vulnerable to division even though they may initially seem like separate property.
What constitutes separate property?
People generally do not have to divide assets that they owned before marriage or acquired after officially separating from their spouse. They can also preserve any gifts or inherited property as their own resources in a divorce.
Many times, businesses might represent an investment a professional made before getting married. Other times, they may have inherited the business from a loved one or received their ownership interest as a gift when a family member retired.
While the owner may hope to protect the business as separate property, doing so can be a challenge. Those who have marital agreements, including prenuptial and postnuptial agreements, have the easiest time preserving businesses as separate property if they addressed the business in the initial contract.
Otherwise, people have to establish when they assumed ownership of the business. They also have to prove that no commingling occurred. Doing so can be prohibitively difficult, as it is quite common to use income earned during the marriage to maintain or improve the company.
People also frequently rely on their spouses to provide unpaid labor to help run the business. Whether a spouse cleaned toilets or issued paychecks using accounting software, their labor could give them an interest in the business.
Any commingling that occurs during a marriage makes at least a portion of the value of the business vulnerable during divorce proceedings. Those who hope to retain sole ownership of their businesses may need help reviewing financial records and negotiating with their spouses. With the right approach, it may be possible to protect the company or at least limit the loss of equity during divorce negotiations.
Setting realistic property division goals is crucial for those preparing for complex divorce proceedings. Divorcing business owners often prioritize preserving a company that they rely on for income above other assets that they may have to divide during divorce.