Business Ownership and Divorce: What You Need to Know

Key Points:

• Dividing a business during divorce can be complex and requires careful planning.
• Determining whether the business is marital or separate property is critical.
• Business valuation may involve multiple experts and different methods.
• Prenuptial, postnuptial, and operating agreements can protect business interests.
• Early planning and legal guidance help minimize costs, disputes, and business disruption.

Table of Contents:

• How Assets Are Valued in a Divorce
• Is the Business Marital or Separate Property?
• Valuing and Dividing a Business Interest
• Other Sources of Guidance
• Talk To a Lawyer

Divorce rarely comes easy. When two lives intertwine—physically, emotionally, and legally—separating them can feel like untying a Gordian knot. Moreover, the longer a couple has been together and the more they share, the harder this task becomes. The challenge increases if the couple co-owns a business or if one spouse owns a business.

During divorce, courts divide marital assets—including businesses—between spouses. Determining who owns the business and its fair market value can be complex. Usually, each spouse hires a valuation expert to examine the business’s finances. Additionally, business division may affect other owners beyond the divorcing couple.

How Assets Are Valued in a Divorce

Most states use equitable distribution to divide assets. Courts classify assets as marital (owned by both spouses) or separate (owned by one spouse). They assign a value to marital assets and then divide them equitably, although not necessarily equally.

Some assets are easy to value, such as joint bank accounts or a marital residence. For example, property assessors or tax records provide reliable valuations. However, other assets, like investments, collectibles, and business interests, require more detailed analysis. Businesses are particularly challenging because ownership and valuation must be determined simultaneously.

Is the Business Marital or Separate Property?

Determining business ownership in a marriage involves multiple factors. Courts consider when and where the business was formed, who worked in it, and how resources flowed to and from the business. If the business was acquired during the marriage with contributions from both spouses, it usually counts as marital property. Conversely, businesses formed before marriage or funded with separate assets may remain separate property.

Nevertheless, a business may convert from separate to marital property if:

• Marital assets are invested in the business
• The business borrows from joint accounts
• Both spouses contribute materially to the business

Even if one spouse owned the business before marriage, the business’s growth during marriage could become marital property. Additionally, state laws—equitable distribution versus community property—affect outcomes. In community property states like California, Texas, and Washington, marital property generally splits 50/50.

Valuing and Dividing a Business Interest

After classifying a business as marital property, spouses must determine its value. Common approaches include:

• Subtracting total liabilities from total assets
• Comparing to sale prices of similar businesses
• Analyzing cash flow, profits, and rates of return

Each spouse often hires an expert, such as a certified business appraiser or CPA. Different experts may reach different conclusions, which can prolong disputes. Consequently, agreeing on a value early saves time, money, and stress.

Other Sources of Guidance

State marriage and property laws guide asset distribution, but contracts can also protect business interests. For instance, prenuptial and postnuptial agreements specify property rights and can override divorce decrees. Additionally, LLC operating agreements may include divorce clauses that restrict a spouse from automatically acquiring business ownership. These clauses allow other members to buy out an ownership interest and protect business continuity.

Talk To a Lawyer

Divorces involving a business can become highly complex. Beyond valuation, divorce can affect income, taxes, and spousal support. Lengthy proceedings increase legal costs and can disrupt business operations. Early legal guidance ensures that your business remains protected and that disputes are minimized.