What Happens to a Business in a Divorce?

What Happens to a Business in a Divorce?

Most couples have to determine how to split assets such as houses, cars, furniture, heirlooms, bank accounts, retirement plans and investments in a divorce. However, some people are also business owners and therefore have to split their businesses in a divorce. This can be a complicated situation.

If you live in a community property state, most assets are split 50/50. However, Florida, like most states, is an equitable property state. This means the court will determine if an asset is marital or separate property, or both, place a value on it, and then divide it between the spouses equitably, which does not necessarily mean equally.

With businesses, though, things are trickier. There are often significant assets (or debt) involved, and it is likely that only one spouse primarily ran the business. So, what happens when the marriage ends? Does the other spouse become a partner? Do they own shares of the business?

As you can see, splitting a business is not as easy as giving one spouse a car or allowing one person to keep the furniture. It is complicated because there are a lot of factors involved. For example, was the business started before the marriage? Did the other spouse contribute to the business at all? For example, did they work in the business? Did they contribute money toward it?

Ideally, a business owner would be prepared for a divorce, but that is not always the case. Even billionaires do not have plans in place in the event their marriages end. Take, for example, Amazon CEO Jeff Bezos. Bezos and his wife, Mackenzie, divorced last year. They were married for 25 years. While Mackenzie helped Amazon in the early years, she is a novelist and mother of four children, and therefore has not played much of a role in the company in recent years.

The couple settled their divorce in April. Mackenzie received 25% of Jeff’s stake in Amazon. This makes her one of the company’s biggest shareholders, with $35 billion in stock. As part of the settlement, she gave up voting control and has no part in Jeff’s other business ventures—The Washington Post and Blue Origin.

When a business is involved in a divorce, there are typically three outcomes — co-ownership, buy out, or selling the business. In a co-ownership, the business is left as-is. The spouses would continue to run the business together. This would be a good option if the divorce was amicable. However, if there was significant conflict involved, then this could be detrimental to the business.

The most common method, however, is buying out the business. Typically, one spouse will buy out the other’s share of the business and run it solo. For example, if a business was worth $1 million, the business would be split in half, so one spouse would give the other $500,000 for their share.

If nobody wants to continue with the business, or there is not enough money to do so, then the best option is to sell the business. Once the business is sold, the spouses would then split the proceeds. However, depending on the type of business and its popularity, it could take a long time to find a buyer. In addition, valuation is a factor. Business values often fluctuate and the spouses may disagree on how much the business is worth, so those are some things to consider.

Protecting Your Business

If you have a business and have not gotten married yet, the best way to protect your business is with a prenuptial agreement. Outline what you want to happen to your business in the event of a divorce and offer an alternative. For example, instead of splitting the business, you could offer the marital home or a lump sum amount. Discuss your business with your spouse before the marriage and hopefully he or she will understand why you want to protect your investment.

If you are already married, not all is lost. You can still get a postnuptial agreement, which is like a prenup, but executed after the wedding. Postnuptial agreements are valid in Florida, but they are scrutinized more thoroughly.

In any case, make sure you are paying yourself a good salary. If your spouse is not seeing any profits from your business, then he or she could claim that you did not contribute any income to the family. This could hurt you in a divorce.

If you have partners in your business, you can protect them with an agreement. A partnership, shareholder or buy/sell agreement can include provisions that protect the other partner(s) in the event of a divorce. It could, for example, keep any future spouses from controlling the business. Therefore, they should not have to worry if you ever get a divorce, and vice versa.

You could also draft an agreement that would forbid company shares to be transferred to anyone without approval from the other partners or shareholders. The agreement could also state that partners have the right to purchase the shares or interest from any other partners who are divorcing so that they can maintain control.

Seek Legal Help

Dealing with a business can be tricky in a divorce. There are many aspects involved, so it is best to protect your business before getting a divorce or better yet, before marriage.

Your business can continue on after marriage, but it may be complicated. Your ex-spouse may be a partner in your business, and this can be a stressful situation. Palm Beach divorce attorney Scott J. Stadler can assess your situation and help you achieve the best outcome possible. To schedule a consultation, call our office at (954) 346-6464.