What Every Business Owner Should Know Before Divorce: 5 Considerations

Guest Blog by Lloyd Malech

Divorce, whether amicable or bitter, is no easy transition for anyone. It involves significant changes and upheaval to routines, expectations, and living arrangements. Business owners' source of income is more than a paycheck – it is an important asset with many moving parts that the divorce process may directly impact. When a business owner contemplates divorce, the process can become particularly complex. Here are five critical considerations to bear in mind:

1. Preserve Key Documents
A business owner is responsible for preserving key documents in the ordinary course of business. However, it is particularly urgent to maintain clear, thorough, and up-to-date records of all business operations, financials, contracts, and ownership documents in the context of a potential divorce. These documents may play a crucial role in determining business value and ownership rights during divorce proceedings. Some key documents to include are:

• Tax Returns
• Annual filings with federal, state, and local governments
• Organizational documents for corporations, LLCs, and other business entities

2. Prove Separate Property
If the business was started before the marriage or inherited, it may be classified as separate property, which means the other spouse is not interested in the business. Clear documentation is crucial to prove that the business began as separate property and was not commingled with marital assets, such as shared bank accounts or using marital funds to grow the business. Creating and maintaining a paper trail to demonstrate that the business has always been kept separate from the marital property will prevent successful claims by the other spouse.

3. Notify Business Partners
Divorce can significantly impact business operations, especially if the spouse has a stake in the business or if the divorce could lead to asset division that affects the company’s liquidity. It is not just good practice, but essential to notify business partners (if any) and discuss how the business will be handled. This open communication is crucial to ensure continuity and protect the company’s stability. Many business entities place a fiduciary duty on co-owners to disclose events that might cause major impact on the business operations.

4. Valuing the Business for Marital Estate
If a business is not separate property, the other spouse has a right to include the value of the business in the marital estate for purposes of fair division. An accurate and fair business valuation can be conducted by business valuation experts who can assess the business’s worth, considering factors like revenue, assets, liabilities, and market conditions. The valuation is often a point of contention in divorce, and this process can help determine if the business will be sold, divided, or retained by one spouse.

5. Planning for Post-Divorce Business Structure
The divorce trial or settlement may impact the business structure. If the business is shared, partners may need to renegotiate roles, buy out the other spouse, or prepare for changes in ownership and control. Planning ahead for this transition ensures the business can continue functioning smoothly.
Depending on a business's type, size, and structure, when an owner contemplates divorce, it can have significant consequences. Confer with an attorney with experience in family law and an understanding of property interests to ensure that the business is as protected as possible to maintain value and minimize disruption.
 
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