How Does Divorce Impact Business Ownership?
Divorce can be one of the most emotionally charged and life-altering events a person experiences. For business owners, it adds another layer of stress. Not only are you dealing with the end of a personal relationship, but you also have to think about what might happen to something you've poured your time, money, and energy into—your business.
Divorce laws can have a major effect on how business assets are divided. Understanding how your business could be impacted is crucial to protect your interests and make informed decisions. Here at Curiale Hostnik PLLC, in Puyallup, WA, we help clients understand how family law impacts their business interests and work hard to protect what they’ve built.
Community Property and Business Ownership in Washington
Washington is a community property state, which means that almost all property acquired during the marriage is considered equally owned by both spouses. This includes businesses started or significantly grown during the marriage. Even if only one spouse actively ran the business, the law may still consider it marital property.
However, not all businesses are treated the same. The court looks at how and when the business was formed, how it was operated, and whether both spouses contributed, either directly or indirectly.
Factors Courts Consider When Dividing a Business
When it comes to dividing a business in divorce, the court evaluates several factors:
When the business was started: If it was created before the marriage, it might be considered separate property, but any growth in value during the marriage may still be marital property.
How the business was funded: If marital funds were used to start or grow the business, that may make it part of the marital estate.
Spousal contributions: Contributions can include unpaid labor, managing books, or taking care of the household so the other spouse could run the business.
Business structure: Whether the business is a sole proprietorship, partnership, LLC, or corporation can affect how it's valued and divided.
Business valuation: A formal valuation may be needed to determine the business's worth, and this number plays a critical role in property division.
For more information on what courts consider when dividing a business, contact me, Attorney Phillip A. Curiale, today.
Business Valuation During Divorce
Before any division can happen, the business needs to be valued. This process can be technical and often involves financial experts. Business valuation typically includes:
Asset-based valuation: Looks at the total value of the business assets minus liabilities.
Income-based valuation: Focuses on past, present, and projected earnings.
Market-based valuation: Compares the business to similar ones that have recently been sold.
Valuing a business during a divorce can be contentious, especially if one spouse believes the business is worth more or less than the other does. In many cases, each party hires their own professional to work with, and the court may weigh these reports to make a final decision.
Options for Dividing a Business
Once the value is set, the next step is figuring out how to divide it. Courts typically look at a few common methods:
Buy-out: One spouse buys the other's interest in the business, usually using cash or other marital assets.
Co-ownership: The spouses continue to own the business together, which is rare and usually only works if the divorce is amicable.
Sell the business: The business is sold, and the proceeds are divided. This can be a last resort if no other option is feasible.
These options can be customized based on the unique needs of each case. A skilled business law and family law attorney can help advocate for a solution that makes sense based on your goals and financial situation.
How Prenuptial and Postnuptial Agreements Come Into Play
In some cases, couples enter into prenuptial or postnuptial agreements that outline what happens to a business in case of divorce. If valid and enforceable, these agreements can significantly influence how a business is treated.
Defined ownership rights: These agreements can specify whether a business is separate or marital property.
Valuation methods: They may spell out how the business should be valued, avoiding disputes later.
Buy-out clauses: Some include terms for how one spouse can buy the other out, which simplifies things during a divorce.
Such agreements can save time, reduce conflict, and protect business interests. They must be drafted carefully and reviewed periodically.
Spousal Support and the Business Owner
Spousal support, also known as alimony, is another aspect that can affect business owners. A court may order a business owner to pay support based on the income generated from the business. This can be tricky if the income varies year to year or is reinvested into the business.
The court looks at factors like:
Length of the marriage
Standard of living during the marriage
Each spouse’s financial situation
The business owner’s actual income
Sometimes, business owners underreport income or take deductions that lower their tax liability but don't reflect true earnings. Courts are aware of this and may conduct a deeper analysis to find the real income picture.
Protecting a Business Before Divorce Happens
There are steps business owners can take long before a divorce is even on the radar. These measures can help reduce risk and protect the business:
Form a legal entity: An LLC or corporation can separate personal and business assets.
Keep thorough records: Document all funding sources and contributions.
Pay yourself a fair salary: This avoids disputes over hidden income.
Avoid commingling funds: Don't mix personal and business money.
Consider a shareholder or partnership agreement: These can outline what happens to a partner's interest in the event of divorce.
These practices make it easier to argue that a business is separate property or to limit how much of it’s considered marital property.
Transitioning From Ownership to a Post-Divorce Business Life
After the divorce is finalized, business owners often need to adjust to a new reality. That might mean running the business alone, sharing control with a former spouse, or starting something new.
Whatever the outcome, it's crucial to reevaluate:
Business plan
Financial goals
Staffing and operational needs
Legal structure
Working with a trusted advisor, such as a family law attorney and a financial planner, can help with making sound post-divorce decisions.
Keeping the Business Running During Divorce
While asset division and ownership rights are key concerns in a divorce, it’s equally important to think about how the business will function during the legal process. Divorce can be emotionally draining, and when a business is involved, day-to-day operations can suffer if you're not careful.
Here are a few ways business owners can keep things moving during this time:
Set clear boundaries between personal and professional matters: It’s important to separate emotional discussions about the divorce from business decisions. Let your employees know that business operations will continue as usual.
Maintain proper financial records: Judges and opposing counsel will look closely at your financial records. Accurate bookkeeping can help you defend the value of your business and show its financial health.
Consult with financial and legal professionals: You may want a forensic accountant to analyze your business’s value or a business consultant to guide you on stability during this time. A family law attorney experienced in business matters can help coordinate these efforts.
Communicate with co-owners or partners: If others are involved in the business, talk openly about what’s happening and reassure them about continuity. Divorce can create uncertainty—being upfront can reduce the risk of internal conflict.
Consider temporary agreements: In some cases, spouses may agree to keep things as-is until the divorce is finalized. Temporary orders can help both parties know where they stand when it comes to finances, decision-making, and business access.
Transitioning a business through a divorce doesn't have to mean disruption or financial loss. With the right approach and guidance from a trusted family law attorney, business owners can stay focused on growth and stability, even during personal upheaval.
Reach Out to a Family Law Attorney Today
Divorce is hard enough without the added stress of what happens to a business you worked hard to build. Whether you're already a business owner or thinking of becoming one, knowing how divorce could affect your company is essential. Protect your business and your future. We serve Tacoma, Washington, as well as cities throughout Pierce County, including Puyallup, Sumber, Bonney Lake, Gig Harbor, and University Place. Reach out to Curiale Hostnik PLLC today.