If you are getting a divorce and you own all or a portion of a business, but your spouse does not own any portion of that business, you might wonder, Will my business be considered a marital asset, to be divided between my spouse and I, even though my spouse wasn’t involved with the business at all?
The answer is, most likely, yes. When a spouse in a divorce case owns a business, the value of the business will most likely be divided among the two spouses in an equitable division of the martial assets. As long as both spouses engaged in “joint efforts” toward the marriage, and the spouse’s ownership interests in the business were acquired after the date of marriage, the business will likely be considered a marital asset (or perhaps a marital debt).
However, the way in which the value of the business gets divided, or in other words, the portions of the business’ value that each spouse “receives,” might vary from situation to situation. Usually the value of the portion of the business which is owned by a spouse will be divided 50/50.
And usually the value of the business is determined by its fair market value, or in other words, how much the business would sell for. Divorcing couples will sometimes get a “business valuation” conducted to better discover this fair market value.
But what if a spouse acquired ownership interests in this business before the date the spouses were married? In that case, the ownership interests in the business might be considered separate property. However, if the business’ value grew or appreciated during the marriage, the increase in the business’ value might be considered a marital asset.
Or, what if part of the business’ value is the business’ “goodwill”? “Goodwill” is an intangible asset of a business, often described as the business’ reputation and ability to generate income from continued patronage. Usually, if part of the business’ fair market value is its goodwill, the value of the goodwill will be equitably divided between the spouses, just like the rest of the business’ value. However, if the business’ goodwill is attributed solely to the spouse who owns the business, such as is the case with most sole practitioners of professional practices and most sole proprietor owners of other types of businesses, then the value of the goodwill will likely not be considered a martial asset. The rest of the business’ value would still be considered marital property (such as the value of the business’ equipment, accounts payable, stock, debts, etc.), but not the value of the goodwill.
It might be helpful to think of it this way: courts want to know, would the business have any goodwill left if the working spouse hypothetically left it, or rather would the business’ good reputation walk out the door with the spouse? If this might describe your situation, it is best to speak with an experienced divorce attorney to further discuss whether the business in your divorce case might involve “goodwill” that is attributable solely to one spouse. Dividing the value of a business in a divorce case is usually complex. It is best to speak with a competent, experienced Attorney to learn more about your particular situation and your rightful claims to the value of your marital business.
Separate vs. Community Property in Utah Property Division Disputes
In order to determine if your spouse can get half of your business if you file for divorce, it is important to understand property division laws in Utah.
Your property during a marriage can be split into two categories:
Separate property is any property you owned and acquired before the marriage. Under Utah law, gifts and inheritance acquired during the marriage are also considered separate property unless the gifted or inherited assets become commingled.
Community property is any type of property – assets and liabilities – you and your spouse have acquired during the marriage (the only exception are gifts and inheritance received by either spouse while married).
Note: Separate property may lose its “separate” status if the assets become commingled (mixed) with community property during the marriage.
When spouses file for divorce, each party will retain their own separate property, while community property will be divided between the parties in a “just and equitable” manner.
What is Equitable Division of Property in Utah?
Utah is a community property state It means that all community property of a married couple must be split between the spouses in a just and equitable manner upon a divorce.
While “just and equitable” often results in a 50/50 split, the community property may not always be divided equally. If equitable is not “equal,” then what is it? Essentially, equitable means fair and just.
In order to divide community property equitably, Utah courts consider a variety of factors, including each spouse’s:
• Earning capacity
• Current employment and work history
• Contributions to the marriage
• Separate assets and liabilities
• The current child custody arrangement if the couple has children
You may not have to go to court to divide your property, including your business, if you and your spouse agree on all of the terms of your property and debt division. It is advisable to seek help from an experienced divorce attorney to help you negotiate property division with your spouse.
Is Your Business Separate vs. Community Property in Utah?
Finally, we get to one of the main questions, “Is business considered separate or community property?” Unfortunately, there is no straightforward answer to that question.
It is difficult to classify a business as a community or separate property, especially if it was created by one of the spouses during the marriage. As a rule of thumb, if you created your business before the marriage, your business will not be subject to property division upon divorce.
However, if you started a business while married, it would most likely be considered community property. As a result, any income from your business will be divided between you and your spouse if you get divorced.
In fact, your spouse may even be entitled to half of your business if the court considers such division to be equitable and fair. If any of the following is true, your spouse is most likely entitled to a portion of your business:
• You founded your business while married;
• You built or expanded your business using marital funds; and
• Your spouse contributed to your business in any way (e.g., he or she donated money, served as a manager or business partner, or worked in any other capacity).
Given that your spouse could claim a portion of your business in a divorce, it is critical to contact a skilled attorney as soon as you know that your marriage is headed for divorce, especially if you and your spouse cannot reach an agreement on property division.
What to Do if Your Spouse is Entitled to a Part of Your Business?
If your business is considered community property and your spouse is entitled to a portion of it, you may wonder what happens to your business. The first thing you need to do is get a valuation of your business to determine its worth. However, if you and your spouse know how much your business is worth, you can agree on a predetermined value without requesting a business valuation. Once you know your business’s value, you need to decide how to “divide” the business in a divorce.
There are several options to divide a business between spouses in a divorce:
• Award your spouse a certain percentage of the business assets or income.
• Buy out your spouse’s percentage of the business.
• Offer a spouse your other assents in exchange for their business ownership.
• Continue to jointly own the business.
• Divide your business into two separate organizations or entities.
• Sell your business and divide the proceeds between you and your spouse.
• Dissolve the business.
How will the business survive if you have to pay half of its value to your wife?
For business owners like you, the question of whether your wife may be entitled to half of your business makes no sense. Men think about how the business can survive with half of its value going the other way and how they can even afford to pay such a price to their wife? Usually as all of this worry takes over, some men start thinking about how to cook the books or do other foolish things to make the business look less profitable or less valuable.
When thinking about your business and whether your wife is entitled to half, nothing at all or something in between, you have to get intensely logical and leave the emotions at the door.
You cannot figure out division of an asset like a business on your own Before you do anything foolish, take a step back and realize you may be over your head. That is where retaining an experienced divorce lawyer and a forensic accountant comes in handy.
Fortunately, the better family law firms work with forensic accountants so you won’t have to scramble to find one.
Step one is learning how the state law treats a business in a divorce
Many factors besides your marriage go into characterization and valuation of a business. Characterization asks what a business is – community property, separate property or a combination? Valuation asks what the business is worth – the community, separate or combined portion. When evaluating what your wife is entitled to from your business, characterization and valuation play a big part.
Is my wife entitled to half my business if we divorce when my business predates the marriage?
If your business predates the marriage, it will likely have a separate property part to it. What that separate property part is depends on several factors. A few are:
• How long before the marriage the business started?
• What the assets and profitability of the business was before the marriage? For a lot of businesses, profitability may depend in large part on the business’ cash flow.
• What the value of the business was at the time of marriage?
• Whether or not the business has become more valuable, less valuable or has the same value as it did at the time of marriage?
• How much of the value change, if any, resulted from the community efforts (your time and/or money invested into it during the marriage and from community sources) versus, as one example, market conditions?
These are just some of the factors that go into determining a separate versus community part of a business that predates the marriage.
Can my wife get half my business in a divorce when the business has been passed down to me by my family?
Whether or not the business predates the marriage, some are passed down from family. For example, a successful auto repair business may be family owned, started by your father, and once he retires, he wants to pass it on to you. Once he does so, you put in time and/or money into the business during the marriage.
What happens with characterization and valuation?
First, we need to show the business was a gift to you or otherwise a transaction that doesn’t create a community interest. Then, we look at what your ownership interest in the business is. Is the entire business being passed on to you or is it being split between you and other family members? Or is your father or parents maintaining an ownership interest?
These are just some of the important questions. From there, we look into what the community time and money invested into business may be and figure out if the community has any interest in the business. The use of a forensic accountant is critical in all this.
Does my wife get half my business in a divorce when I have a business partner?
Regardless of when the business started or how you acquired it, if you have a business partner or partners, fellow shareholders or members (for LLCs) that have an equity or ownership interest, the characterization or valuation process becomes more complicated. Will your co-owner get entrenched into your divorce? Maybe, if his or her ownership interest, role or other involvement affects characterization or valuation.
But this shouldn’t cause too much concern. With an experienced lawyer and forensic accountant and a proper paper trail to show his or her interest is legitimate, this process doesn’t have to be overly complex. Unless your co-owner really does not have an interest in the business and the whole thing is a rouse, you can relax because his or her interest can be carved out and separated from yours and the community portion, if any.
Is my wife entitled to half my business if we divorce when my business was started with separate property funds?
Even if your business started during the marriage, that doesn’t mean you should assume the business is community property. There are many things, a few of which we have discussed, that could make a business separate property, in whole or in part. Another is separate property funds.
It’s common for a business to get off the ground with start-up money. That money may be gift from family to you, money you had before the marriage or money you invested from a separate property source. That investment may create a separate property interest in the business, which is yours and not that of the community.
From there, a similar analysis is done as we have laid out earlier. Did the community also put in time or money into the business? What is that and what value did it bring to the business? What impact did it have on the business’ profitability or valuation? These are the questions your attorney and forensic accountant will work with you to answer.
Beware of double dipping when dividing a business in a divorce.
Is your wife asking for support? Are you paying it or will pay it? Where does that spousal support come from? Your business right? So your wife wants half of the business’ value and part of its profits for spousal support? So your wife wants more than 50% then?
Double dipping can be unfair and under some circumstances there is an adjustment that should be made when a spouse is paying spousal support from a business’ profits and being asked to divide the community property part of the business.
Whether there is an adjustment and how much depends on the facts of the case.
What have you learned about the issue of whether your wife is entitled to half your business if you divorce?
We have just scratched the surface of this issue. There is so much more that goes into it. What I hope you have learned though is that asking the question of whether your wife is entitled to “half” is the wrong question.
Characterization and valuation are at the heart of dividing a business. But the type of business, industry, revenue, gross versus net profit, the community versus separate property contributions and portions, the role of goodwill and the future economic forecasts and more all may play a factor into how much of the business is community versus separate property and how much you may have to pay to your wife.
We hope this article gave you some insight into this sometimes complex issue. It takes a lot of time, effort, and money to build and run a business, which is why the mere thought of losing your business to your spouse upon divorce may seem too frustrating and devastating.
If you run a business and are headed for a divorce, you need to learn about the state’s property division laws to understand what happens to your business if you get divorced.
It is essential to contact an experienced divorce attorney in Utah if you are a business owner contemplating or going through a divorce. A Utah divorce attorney will protect your rights and interests and help you make an informed decision about your business during your divorce case.
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