Deciding What To Do With A Business In The Event Of A Divorce

If you and your spouse own a family business and you are considering divorce, then you will need to decide what happens to the business. The first issue is to determine whether the business is community property or sole and separate property.

Arizona is a community property state. This means that property acquired by a spouse during the marriage is considered community property unless the property was a gift. Most property acquired by a spouse prior to the marriage retains its character as sole and separate property of that spouse. However, even if you or your spouse owned the business prior to the marriage, there still could be a community interest if the value of the business increased during the marriage.

If a sole and separate asset has gone up in value during the marriage, it may be subject to a community lien, which is a reward to the marital community for contributing to the increased value. If an increase results partly from the efforts of either spouse during the marriage or partly from the expenditure of community funds, it may be partly community property.

In the case of a business, the issue is how much of the increased value of the business resulted from one or both parties’ work during the marriage and whether there was appropriate compensation for that work.

WHAT HAPPENS TO THE BUSINESS IF ALL OR PART OF THE BUSINESS IS CONSIDERED COMMUNITY PROPERTY?

The following are several common options that are available when deciding what to do with a business in the event of a divorce:

1) Buy Out. In exchange for sole ownership of the business, one spouse “buys out” the other spouse by paying the other spouse’s community half of the business’ value. If you choose this option, then you need to determine a fair market value for the business. Your spouse might tell you that he or she knows the value of the business. Keep in mind that your spouse might not be acting in your best interest. Therefore, it is usually a good idea to hire an expert to perform a
business valuation.

2) Keep running the business together. Often times the conflict that results from a divorce may make this option impractical. However, if you and your spouse can set aside any differences and remain business partners, then this may be a good solution. If you decide to stay in business with your soon-to-be ex-spouse, then you should decide what will happen to the business in the event that it does not work out. A buy-out agreement can save you a lot of frustration in the future if things go awry.

3) Sell the business. If neither you or your spouse wishes to continue to operate the business, then you can attempt to sell the business and divide the proceeds equitably.