When a couple goes through a divorce, assets and liabilities must be divided. If you have children, you must decide on child support and child custody. When divorcing spouses own a business together, you and your spouse must determine the value of the business and agree on a fair settlement for each spouse’s interest. If business ownership is part of your divorce case, it will add a layer of complexity to the divorce settlement process, especially when you and your spouse are business partners.
Valuing a Business in Divorce Proceedings
Business valuation is an essential part of the process of dividing a business. When you own a small business (or a family business), getting a valuation from an appraiser is critical. You must determine the market value for your business. To determine the marital property division, you must know what the asset is worth. It’s more complicated than dividing an asset like a brokerage or bank account.
An appraiser will be able to determine the appropriate valuation method for your business. You may also need to engage a forensic accountant in the process. Their professional practice will be invaluable during the valuation process as well.
To determine the value of the business, the valuation professional will consider the following:
- Tangible personal property
- Intangible property
- Assets
- Liabilities
The spouses can agree on a single expert, retain multiple valuation experts, or agree that an arbitration panel will set the value. These are common options spouses use during divorce proceedings to decide the value of a business.
Protecting Business Interests During Divorce
When you have your own business, you’ll do anything to protect it. If you owned the company before getting married, it could remain your separate property despite your marriage. However, many businesses become martial assets during marriage. For example, if the business value increases during marriage, the increase may be a marital asset.
Whether a business is considered marital property, subject to the division in the divorce, depends on several factors. These factors include whether the business is subject to a prenup or postnuptial agreement.
Even if your spouse was not directly involved in the business, the business may become part of the property distribution during your divorce. In such cases, you must negotiate a fair settlement.
Negotiating a Fair Settlement
When each spouse is a shareholder in a business, the business interests may be the couple’s most valuable asset. Negotiating a fair settlement becomes of critical importance. The parties have several options when distributing a business interest during a divorce.
These options include the following:
- A buy out
- Co-ownership
- A business sale
Divorcing spouses rarely choose to remain business partners, but it’s possible. Getting help from an experienced divorce attorney can provide you with negotiations.
Tax Implications of Dividing Business Assets
Identifying a potential tax liability early on in the proceeding of divorce is essential. This will help you make informed decisions and avoid costly unintended tax consequences when dividing business assets. There is good news when transferring business interest to a divorce. When this occurs, the business assets can be transferred between former spouses without recognizing capital gain or loss.
Sometimes, transferring assets during the divorce proceedings is impossible or practical. Tax law can provide additional time to plan for difficult-to-transfer assets, including privately held businesses. This rule applies to transfers made within a year of the end of the marriage and up to six years after the divorce agreement. The spouses would not owe capital gains tax after receiving a portion of the business.
Impact of State Laws on Business Division
The family law in your state governs property distribution during a divorce. After the divorce, you’ll need to decide each spouse’s share of the business and ownership. The equitable division will depend on state law.
State Law
Some states use equitable distribution to divide marital property. Ex-spouses split business and other martial property fairly, which is not necessarily equally.
In community property states, there is a 50/50 split of property acquired during marriage. Businesses started during the marriage are generally considered community property. Businesses started before the marriage are not automatically separate property. It depends on factors, such as whether both spouses contributed to the business.
Federal Law
Under current federal tax law, spousal support in the form of alimony cannot be used to claim a federal tax deduction. However, under state law, the results can be different. For example, the payer can deduct the alimony payments under their California state income tax form. The recipient of spousal support is not required to report the payments on federal income taxes, but the recipient must include it as income for California state income taxes. When a spouse uses business income to calculate an award, the income reported must be accurate.
