When you divorce, your marital property is subject to equitable distribution. If you own all or part of a business and your business interest is characterized as marital property, the court may divide that interest between you and your spouse.
Forward-looking decisions made during the beginning stages of a business can provide for the contingency of divorce. Yet, even if you neglected to include the possibility of divorce in your early planning, creative agreements arrived at even after a divorce is underway can go a long way toward protecting this valuable asset.
Marital property is defined by Pennsylvania Domestic Relations Act as 1) all property acquired by either spouse during marriage, and 2) any increase in the value of non-marital property that occurs during marriage. (Non-marital property may include property acquired by a spouse before the marriage or a gift or inheritance received by a spouse either before or during the marriage.)
The marital-property designation applies regardless of how your property is titled. Thus, even if your property is held in your name alone, it will be presumed to be marital property if it was acquired during your marriage.
Business interests are property interests like any other. If you began your business during your marriage, your entire business interest is marital property (in the absence of a valid agreement to the contrary) and subject to distribution between you and your spouse. If you acquired a business interest before your marriage and its value increased while you were married, the increase in value is marital property, as well.
It is important to note that the structure of a business will not determine its marital-property status. Thus, both a partnership interest and an interest in a corporation may be categorized as marital property.
Valuation of Marital Property
Once the court has determined which of your assets constitute marital property, a valuation of those assets is required before they can be fairly distributed. The valuation of a business is a complex procedure that requires the consultation of experts to ensure accurate and fair results.
Laws governing particular business structures as well as owners’ agreements may be among the many factors considered in determining value. A partnership agreement, for example, might be a factor in valuing a partner’s interest. Likewise, a buy-sell agreement may aid in determining the value of a stockholder’s interest.
Division of Marital Property
After the assets have been valued, they must be equitably divided. Unless you and your spouse have executed an agreement regarding asset distribution (to be discussed below), the court will divide your marital assets by considering factors specified in the applicable statute. The court will determine, in each particular case, which assets (and what percentage of value) should fairly go to which spouse.
One of the factors the court must consider is the “contribution or dissipation of each party in the acquisition, preservation, depreciation, or appreciation of the marital property.” Thus, the court will consider the relative contributions you and your spouse have made to your business.
If your spouse had little to do with the running of the business, the court may award all or most of the business to you and assign other assets to your spouse, if sufficient marital assets exist to allow for such a division. Stated in the alternative, the more your spouse contributed to the profitability and success of the business, the more likely he or she will be awarded a percentage of the business.
Take Note: You do not need to leave the distribution of your business assets to the courts.
You and your spouse can agree to any and all aspects of property distribution, as long as the agreement is fair and otherwise enforceable under the law. The determination of marital property rights, including the distribution of property upon divorce, can be determined and, indeed, controlled through the use of any properly executed contract. Such contracts include both pre-nuptial and post-nuptial agreements, as well as settlement agreements. The rights of parties to determine their respective marital property rights through such agreements is recognized and, in fact, encouraged by Pennsylvania contract and divorce law.
Such agreements can supersede the usual method of equitable distribution. In other words, property that would have been designated as marital property subject to equitable distribution may be excluded from marital property by agreement of the parties. If you and your spouse cannot agree to designate your business as non-marital property, you may still come to a fair and enforceable agreement regarding its distribution.
This can be done before or during marriage, or after a marriage is dissolved. Even if you failed to consider the possibility of divorce when you began your business, you may still be able to protect your interests after divorce proceedings have begun, if you and your spouse can come to a satisfactory agreement.
Selling your business and dividing the proceeds is probably the last thing you wish to do. Unless no other option exists to accomplish a fair division of assets, there are ways to avoid this unpalatable solution. If your primary aim is to preserve your business, you may have several alternatives at your disposal.
If you possess sufficient marital and non-marital assets in addition to your business, you and your attorney may be able to persuade your spouse to accept some of those other assets in satisfaction of the share to which your spouse is entitled. This will allow you to assume sole ownership of the business and keep it running.
Be cautious in taking this tack, however. Becoming “business-poor” (left with little but your business interest) is not particularly desirable. On the other hand, if your business is your only source of income, you may be forced to go this route despite its disadvantages. Your attorney can help you view the situation objectively and make the wisest decision under the circumstances.
If you do not possess sufficient assets to immediately purchase your spouse’s interest, you might be able to persuade your spouse to agree to let you keep the business running, and to accept payments from future business proceeds as her share of the marital assets. There are pitfalls (including tax consequences) that must be considered in choosing this option, as well.
For example, provision will need to be made for the potential failure of the business before your debt to your spouse has been met. If full ownership of the business is given to you, alone, the court may put a lien or charge upon the business as security for the payment of alimony or any other award given to your spouse. In fact, the court may order the sale or transfer of your business in order to satisfy your obligation.
With the help of an experienced and knowledgeable attorney, you can anticipate and address the many issues that may surface when business-owners divorce.
If you and your spouse have both been involved in the business, for example, questions may arise regarding which of you will make business decisions and control operations during the pendency of your divorce. This is something that can be anticipated and dealt with in a partnership, shareholder, or other agreement when the business is set up. (It may also be dealt with in a separate agreement between you and your spouse, executed before, during, or after marriage.)
A vindictive spouse may engage in behavior calculated to injure your business or to defeat your rights in the business in retaliation for your having filed for divorce. An injunction may be entered to stop such behavior. In one case, a court entered an injunction to preserve the status quo until the equitable distribution of assets (which included a business) could be made.
An example of just how badly matters can go awry in the absence of well-conceived planning can be seen in a case decided in 2004 by the Superior Court of Pennsylvania. The husband owned and operated a business that was deemed a marital asset upon the parties’ 1985 divorce. Rather than forcing a sale and division of the proceeds, the court allowed the husband to continue operating the business and required him to pay the wife for her share of the assets with monthly payments to be made over a 15-year period.
After only a portion of the payments had been made, however, the husband’s business failed. He ceased payments and was never able to resume them in the amount required by the distribution order. A full 18 years after the order was entered, most of the amount owing to the wife remained unpaid. The husband was jailed at least twice for contempt of the court’s order. (Although he did possess other assets by which he could have satisfied at least part of his obligation, these assets were protected as tenancy-in-the-entirety property owned by the husband and his second wife.)
Decisions regarding the set-up and operation of a business should be made with expert assistance. The possibility of divorce and its potential effects on your business should not be excluded from consideration. Yet, a business owner who has neglected to anticipate and provide for the contingency of divorce can still undo much or all of the damage. With the help of a divorce attorney experienced in business matters, you can take steps to protect what may be your most valued asset.