Reviewed by Michael Colin Barrows, Esq.
Key Takeaways
- A business started during the marriage is marital property even if only one spouse ran it.
- A business you owned before the marriage stays separate, but its growth during the marriage may not.
- Paying business expenses from a joint account can pull the company into the marital estate.
- Once the case begins, you cannot restructure, transfer shares, or take unusual distributions.
- Understating your business on the Statement of Net Worth is sanctionable inside the divorce.
To learn about business owner divorce and whether your business is subject to equitable distribution, continue reading. For assistance with your upcoming legal matters, do not hesitate to contact our Long Island business valuation lawyer. Here are some questions you may have:
Is My Business Subject to Equitable Distribution in a Divorce?
It is common for those who solely own businesses to assume that they will not be subject to equitable distribution. However, businesses will be considered marital property in many cases, meaning they will be subject to equitable distribution. Even if you were the only individual who ran and operated your business while your spouse stayed at home, taking care of daily chores and raising your children, there is still a good chance that the courts will determine that your spouse actively contributed to your marriage, and they are entitled to a portion of your business.
You should note that only marital property is subject to division during a divorce. As such, separate property, which includes anything owned by either spouse prior to the marriage, received as a gift from a third party, inherited, or designated as separate property through a prenuptial agreement, is not subject to equitable distribution. However, nearly everything else obtained during marriage is considered marital property, regardless of whose name is attached to the assets.
Importance of Timing in These Matters
It is important to understand that, often, the timing of when a business is formed matters more than the title. As such, a business formed during the marriage is marital property, even if it is only operated by one spouse.
A business established before the marriage will typically begin as separate property. However, the court will often consider whether or not it increased in value over the course of the marriage through the efforts of either spouse, and that appreciation is generally considered marital property and subject to division, even if the business itself is not.
Commingling is also important, as paying business expenses from a joint account may result in some of the company becoming marital property.
How Is the Value of a Business Determined?
When a business is determined to be marital property by the courts, the next step that will occur is the assigning of value to the business. If you are a business owner, there will be various financial documents that you will be required to provide concerning your business, including the following:
- Your business’s regular income
- Whether your business has any debts or liabilities
- The overall value of your business
When you submit this information, it is crucial that you are truthful and that you ensure there are no discrepancies.
The consequences of providing false information, knowingly or unknowingly, can impact your divorce. When going through this process, you must provide full financial disclosure through a sworn Statement of Net Worth, as required by both 22 NYCRR § 202.16 and Domestic Relations Law § 236 (B)(4). Noncompliance is punishable in accordance with the penalties outlined under CPLR § 3126.
For couples navigating this process, understanding the bar on double counting is imperative. When a business is valued by capitalizing its future excess earnings as a professional practice or service business typically is, that same income stream cannot be used when determining maintenance. This rule was narrowed by the Court of Appeals in Keane v. Keane, holding it does not extend to tangible, income-producing property. As such, whether it applies depends on what kind of business you own and how it is valued.
How Can I Protect My Business in a Divorce?
First and foremost, it’s critical to understand that, from the minute the case begins, automatic orders take effect and bar either spouse from selling, transferring, or encumbering property without the written consent of the spouse or a court order. This also includes restructuring the company, transferring shares, or taking non-ordinary distributions.
There are various ways to protect your business in a divorce. For example, if you own a business and are not yet married, drafting a prenuptial agreement to state that the business is to be considered separate property in the event of a future divorce can secure your business. If you are already married, you may still draft a postnuptial agreement that will serve a similar purpose. If you and your spouse jointly own a business, you may draft a shareholder agreement that outlines each spouse’s interest in the business in the event of a divorce.
In the event the business is already marital property and no agreement has been established, there are typically three outcomes:
- You may continue to co-own the business, which is often only viable when you and your spouse are on civil, if not amicable, terms
- You may sell the business and divide the proceeds
- You may buy out your spouse’s share of the business, ultimately relinquishing assets of equal value, which is the route most owners prefer
Contact Our Experienced New York Firm
Barrows Levy PLLC is a dedicated New York law firm focused on providing quality legal services to clients in New York City and Long Island. If you require a lawyer who has notable experience handling family and estate planning matters, Contact Barrows Levy PLLC to schedule a consultation with one of our experienced attorneys today.
