If you or your spouse owned a business while you were married, there’s a good chance the community has an interest in that business. That means that you're an entrepreneur getting a divorce: You'll have to deal with valuing and dividing the business in addition to the other divorce issues we talk about on this website. Valuing businesses can be quite complex, especially if the business contains both community and separate property interests. Once a value has been decided upon, there are several options for what to do with the business.
Some businesses exist as more than just a partnership, a corporation, or an LLC. Certain professions have licensing requirements, professional standards, rules of conduct, or other, specific requirements you must comply with to avoid penalties, or even civil or criminal liability. For example, lawyers are cannot have a non-lawyer as a partner in a firm. Many other professions also prohibit a lay person having an ownership interest in a professional practice. When this comes up in a divorce, it’s important to distinguish between a community interest in a professional practice because it was started during the marriage, and outright ownership of a professional practice by a lay person, which is usually prohibited by state law. Because of this, some options to divide and allocate community property professional businesses simply aren’t available. However, that doesn’t mean that it’s impossible to divide these businesses — just that you’ll need to get a bit more creative.
The most straight-forward method of dividing a community property business is to simply divide the business. When spouses own a 100% interest in the business, the business can be divided so that each spouse will own a 50% interest in the business. This is one of the simplest methods of dividing a community property business. However, it creates several issues.
First, the actual division needs to happen. Sometimes, this can be quite simple — sign a few papers, and an equal share of ownership of the business is transferred to each spouse. Other types of businesses can be much more complex to divide, and might require entirely new contracts to be drafted, or possibly a complete reformation. Additionally, and perhaps more obviously, you still might be working with your ex-spouse in the future. For an amicable divorce, this might be acceptable, but jointly owning a business with an ex-spouse after an acrimonious or contested divorce won’t be feasible. And, it just might not be possible to co-own a professional business because of possible ethical restrictions.
The second possibility for dividing any community property interest in a business is a buyout- one spouse takes the entire interest in the business, and the other spouse is allocated an amount of community property commensurate to the value of their interest. So, for example, one spouse might take the entire business, and the other spouse might take the house, or an extra car, or maybe just a check with a couple extra zeroes. However, business interests aren’t the only community property interest that can be bought out, which means this is a prime opportunity for some creativity in dividing property. Interests such as retirement accounts, or even things like spousal support, can be discharged or offset with lump sum payments, which means the community property offset for buying out a business can be a perfect way to resolve a different, contentious issue.
Selling the Business
The last possibility for dividing a business is to sell it and split the profits. While this is certainly a valid possibility in its own right, be aware that there is no court-mandated organization that exists to buy businesses, so the onus will be on the parties to find someone interested in buying the business at a reasonable price, if they want in any kind of favorable deal. It should further be noted that, if parties disagree on how an asset should be divided, and neither can provide a more compelling reason for a particular division than the other, the court will commonly order an asset be sold and the proceeds split. That said, if you can find an interested buyer, selling a business outright will simplify the divorce considerably, and some businesses just cannot be split.
As you can see, the possibilities are quite expansive, which gives parties freedom to make the best decisions for their particular case. But with that freedom comes a certain amount of responsibility- the law, and the Court, won’t be making ideal decisions on your behalf. Still, with careful consideration, it’s possible to come to an equitable division of your business that respects both spouse’s interests, and the laws of the state.