During the divorce process, all the assets of the couple will be divided. If they are currently managing a family business, one of the three outcomes can happen after the proceedings: Only one spouse keeps the business, both spouses keep the business, or both spouses sell the business.
The outcome depends on what the family business is considered as. Note that if you started the business during your marriage, it will not be automatically considered marital property. Likewise, if you started the business before getting married, it is not necessarily an individual property.
The business’s fate after divorce also depends on who got divorced. If you and your ex are the top managers because you are the parents, it won’t be the same as when it’s your married children that got divorced. Basically, a number of circumstances affect your stakes in a family business when a divorce occurs.
Parents’ Divorce
If you and your ex are the parents in the family, the court will determine whether your family business is marital property or community property. They will evaluate several factors, such as:
- The date of the business’s establishment
- How the business was financed
- The contributions you and your ex made for the business
- The skillset needed to run the business
- The value of the business before the marriage and at the time of divorce
- The change of value in the business
Experienced family lawyers might not consider your family business a marital property even if you started it during your marriage. Such happens if the business was an inheritance or received as a gift. In this case, you and your ex can make an agreement that only one of you will keep the business.
The same agreement can also be made if you or your ex buys out the shares of the other. This method has tax benefits. Direct purchase of shares is considered a transfer of property incident to divorce and, therefore, not taxable.
If the buying party doesn’t have enough liquid assets to buy out the shares of the other, you can make a settlement note to be paid off over time. Or, the family business can buy back the shares of the departing party, though that may result in capital gains taxes.
If your family business is classified as marital property, but you started it before the marriage, such classification could be because:
- You and your ex combined your individual and marital funds to start the business
- The non-owner spouse quit his/her job to join in running the business
The family business can also be classified as part-separate property and part-marital property. In this case, both you and your ex may retain ownership of the business, or choose to move to sell it and move on.
Children’s Divorce
The ownership of your family business may also become fragile if your child divorces their spouse, who also has a share in the business. If you transferred the business’s shares to your child when they’re still single, the shares’ value on the date of his/her marriage will be classified as excluded property. The growth of that value, however, will become family property. That means your child has to divide it equally with their ex.
If you transferred the shares of the business after your child’s marriage, those shares may be classified as gifts, and therefore not counted as family property. But this outcome is only possible if no consideration was made for the shares. If your child has made considerations, the shares may become included in the family property, which means that he or she will also divide its value equally with his or her ex.
Some parents protect their family business by encouraging their children to sign a pre-nuptial agreement before getting married. But children may not be easily persuaded to do this. After all, hardly anyone likes the idea of not sharing something with their loved one.
Spouse’s Own Agreement
To avoid disputes, you and your ex should reach an agreement that will benefit you both. You can keep managing the family business together if you’re emotionally tied to it. As long as you’re amicable with each other and are both competent managers, the family business should stay thriving.
You and your ex can also relinquish your ownership of the business and sell it. Deciding such will allow you to venture into your own interests that you didn’t get to enjoy while married. However, selling the business may prolong the divorce process, and you and your ex should keep working together until the finalization of the proceedings.
Despite your options, there is really no easy way to manage your business after the divorce. The emotional impact of your separation will definitely affect your work. Hence, try to be civil with your ex, since both of you have the best interest of the business at heart.