A Business Owner’s Considerations During Divorce

Shortly before their wedding, Mack and Julia opened a business that manufactured and distributed small electronics. Their three partners were Mack’s friends from college. After 12 years, Mack and Julia decided to divorce and began dividing up assets. As business owners, they now had to consider how to handle their business during their divorce.

Basic Considerations.

When it comes to dividing assets and debts in a divorce, Florida is not a community property state. Instead, the state relies on Equitable Distribution to distribute marital assets. The question becomes whether the business is considered a marital asset, and the best way to fairly divide it.

Mack and Julia’s divorce may be more complicated than most. They own and run a business together with additional partners. They each have an interest in the business and have contributed sweat equity.

Business-Specific Concerns.

A business owned by one or both spouses may make up a significant part of their assets. How that business interest is divided may depend on:

• How much the business is worth. Before the business can be split, the parties need to know how much their business interests are worth. It’s likely that one or both divorce attorneys may hire experts to arrive at a value for the business. Business owners may want to make sure their business is not overvalued or undervalued.
• Whether it’s a marital or nonmarital asset. If a business was started before the marriage, it could be considered a non-marital asset. However, that nonmarital status could have changed during the marriage if the business owner commingled interest. Likewise, if the owner’s spouse contributed to the business, either through labor or money, the business interest could now be a marital asset.

Though the business was started before their marriage, Mack and Julia both contributed to the business and owned an interest. However, Julia’s involvement in the electronics company lessened after a few years because she opened an insurance agency on her own. The insurance agency may also be considered a marital asset since it was opened during their marriage; however, Julia’s interest in the electronics company may have decreased in value. A court or mediator typically would consider Mack and Julia’s interests in both business when coming up with a settlement.

Preventive Measures.

No method is foolproof, but there are a few things you can do before divorce becomes an issue:

1. Consider Establishing a Trust. Business assets could be moved to a trust and, in some cases, the business may no longer be considered a marital asset. This strategy is more complicated than it sounds and should be discussed with an attorney.
2. Prepare a Buy-Sell Agreement. This type of agreement may help a business stay in operation without divorce-related interruptions. Again, this strategy is not without pitfalls.
3. Purchase Insurance. A life insurance policy with cash value may provide funds needed to buy-out your spouse’s interests.

When opening their electronics business, all the partners should have prepared a buy-sell agreement. Though these agreements can be negotiated at any time during the life of a company, it’s often best to do it right along with the business formation paperwork. The buy-sell would have laid out how to handle the incapacity, death, or divorce of the partners.

Don’t Forget to Change Your Estate Plan.

Major life events usually trigger a review of estate plans. Divorces are no exception. Not all documents will be automatically changed because of a divorce.

Attorney John Mangan is board certified in Wills, Trusts & Estates by the Florida Bar. Please call us at 772-324-9050 or use our Contact Form to set up an appointment. We help clients throughout Florida, including Stuart, Palm City, Hobe Sound, Jupiter, and Port St. Lucie.