A business is a marital asset that may be divided during divorce. Determining how much each spouse contributed to the business and therefore how much each should get becomes contentious. For business owners who are considering divorce, having a lawyer is indispensable. The attorney should be experienced in business division, as most divorce attorneys have only worked with couples who are non-business owners and are thus less familiar with the intricacies of dividing a business. Let’s look closer.
When Is A Business Considered Marital Property?
Only marital property (also known as community property) may be divided during divorce. Each spouse gets to keep their own separate property. Hence, the first thing to determine in a business division is whether it is community property or separate property.
In general, a business formed during marriage is considered community property under Arizona law. However, this does not automatically mean that the company will be divided equally between the spouses. (We’ll explain more about the division later in this article).
If one spouse, on the other hand, created the company before the marriage, or otherwise inherited it, that company may be considered separate property and thus not eligible to be divided.
There is one major exception to this. If the other spouse added value to the company during the marriage, this spouse has the right to an equitable part of that company. This is referred to as a community lien. The court will examine each spouse’s contributions to determine their equitable interest.
How The Court Divides A Business in AZ Divorce
To make a fair division of business, the court will carefully consider many factors including:
- The value of the business. Each spouse’s attorney or business appraiser may have their own methodology in valuing the business, leading to dissimilar valuations. They will have to convince the judge on what they believe is the most appropriate valuation. This should be supported by financial records, statements on profits and losses, balance sheets, contracts, invoices, trademarks, and other relevant financial information.
- The type of business. A manufacturing business may have assets such as equipment and real property, while service businesses may have added value like long-term customers and technical expertise.
- How much each spouse invested in the business. This includes both time and money contributions.
- Business liabilities. Debt and financial complications will lower the breakup value of the business.
- Other interests. If the business has other owners, partners, or investors, their interests will have to be protected in the division.
Courts rarely split a company 50/50 between a divorcing couple. It is more likely for one spouse to get a bigger share, especially if that spouse made more contributions to the business or already owned part of the company prior to marriage.
What Is Buyout/Offset?
It is possible for some couples to continue being business partners after divorce, representing their own interests. But for spouses who wish to gain sole ownership of the post-divorce company, a buyout or an offset are two other choices.
Buyout means buying the other spouse’s business interests. Offsetting, on the other hand, means that one spouse will give all their business interests to the other spouse, in exchange for other marital assets of similar value.
Can A Pre-Nup Affect Business Division?
Yes, a prenuptial agreement can dictate what happens to a business upon divorce. In most cases, business owners who are about to get married are advised to create a pre-nup that protects their company from a possible division down the road. A couple may also plan together on how they would like their joint business to be divided during divorce.
Business division during divorce is a highly complex area of the law. It requires knowledge of family law, business and taxation law, property law, and more. If you are seeking knowledgeable guidance and protection in your Arizona divorce, call Goldman Law at (602) 698-5520 for experienced and case-specific advice.