How Divorce Affects a Family Owned Business

Family-owned businesses can sometimes feel like another child in a marriage. Some businesses are passed down through families with the expectation that the next generation of children will take over and take care of the company, then pass it down to their own kids when the time comes. Today, it’s very possible that one party may own the business before getting married with the intention of bringing his or her spouse on board to grow it into a family business.

Either way, there are complications that arise once divorce is on the horizon. The uncertainty of the future can strike fear into anyone whose livelihood depends on the business, which could very well be subject to asset division. Still, there are considerations to be made if you have yet to marry, and strategies to plan if your marriage is ending when it comes to a family-owned business.

Marital asset division

If you have inherited your family business, it may already have some protection from asset division. However, when your marital income derives from that business and you are funneling money back into the company, you’re going to open Pandora’s box. Your income during the marriage is a marital asset and if you are using any of that money to maintain a family business, you are likely going to have an issue with at least some of that business becoming marital property, subject to asset division during a divorce.

If the company is strong enough, you might be able to get away with having a business valuation performed by a forensic accountant to determine how much your spouse should be entitled to receive. If you’ve dumped all of your money back into the company, and your spouse who also works there has contributed income to keep the business running, or to grow it, he or she may be entitled to more than you think.

The value of a prenuptial or postnuptial agreement

A prenuptial agreement could save you a lot of headache and the heartache of losing your family business in a divorce. This financial planning tool is something to discuss with your soon-to-be spouse before you walk down the aisle. It can be a difficult conversation, and your goal is to protect your family’s legacy while not instilling hard feelings that your future spouse may not be able to move past. It takes a delicate, tactful approach that a skilled family law attorney can help you formulate to get over the hurdle unscathed.

If you form a business after marriage, discussing a postnuptial agreement to protect both of you is also a smart option. You have a few options for dealing with a business co-owned with your spouse after divorce:

• If you think you can both handle it and the business is worth saving, you can continue to own it together and reap the financial benefits.
• Implement a buyout option where one of you retains full ownership of the business and pays the other spouse an equitable share to give up his or her share. This requires engaging in the complicated business valuation process.
• Another option is to sell the business and split the profits. This not only requires a business valuation but also a business broker who can procure potential buyers for you. Depending on the size and type of business you own, this can take some time to accomplish.

For either of the last two options, you will need to consult with a CPA to determine the tax implications of you of receiving a payout as a part of your marital settlement. Bear in mind that your attorney is there to negotiate for you and virtually everything is negotiable so don’t be so quick to give up if one of you seemingly takes a hard line on a subject.

It can be a tough, emotional decision to let go of a family-owned business. It becomes like one of your children that you’ve watched grow and nurtured along the way, and suddenly it’s gone. Nothing is typically easy in a divorce, but your attorney can lay all of the information in front of you that you need to make a well-thought out, rational decision for yourself and for your family.

The Fulton divorce and asset division attorneys at McCabe Russell, P.A. are prepared to help you through the difficult process of ending your marriage and tying up the loose ends of what to do with your family business in the respectful, dignified manner that you deserve. To speak with a member of our fierce legal team call 443-812-1435, or we invite you to reach out to us through our contact form.