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Divorce and Small Business

No matter who you are a divorce is always a difficult process. However, when one or both spouses are small business owners, dividing the business assets can make the process even more difficult and complex. While some people may not think of a small business as martial property, business assets are treated just like other assets and are subject to marital division. The following two situations involving small businesses often complicate the divorce process for business owners. 

Valuation - What is the business worth?

In a divorce proceeding, all property must first be classified as either martial or non-marital property. Marital property includes any assets earned or acquired by either spouse throughout the duration of the marriage. Non-marital property is property owned prior to the marriage, property received by gift or inheritance, or property excluded by a pre-marital agreement.

If the business was owned prior to the marriage then the business might be classified as non-marital property. However, if the business has grown and increased in value since the date of marriage; if both spouses contributed significant labor to the business during the marriage; or if the business was supported by marital funds; the increase in value may be considered marital property.

Typically, the increase will be determined by comparing the value of the business as of the date of marriage to the present-day value of the marriage. It is often necessary to engage an accountant or business appraiser, in addition to your attorney, to review balance sheets, tax returns, property values, and business income to derive these business valuations. The process can be further complicated if the business does not keep good records or has not filed tax returns for several years. Similarly, both spouses may hire independent experts to testify as to their value determination for the business. In that case, ultimately it will be up to the judge to decide which expert she finds more credible.

Determining Income - How Much Money Does the Business Owner Make?

The amount of child support and/or maintenance payments owed in a divorce are ascertained by a formula which includes comparing the income of the parties. Determining a business owner's income can be a difficult process. Small business that are not publicly traded have an incentive to report the lowest level of business income and profits on their tax returns to avoid paying taxes to the IRS.

Similarly, often times small business owners run expenses through their businesses. In a divorce proceeding, the Court will make its own determination as to whether or not a business expense was reasonable. If the Court determines that a business expense is unreasonable, it may consider that amount as income to the spouse who runs the small business. It is beyond the scope of this article to discuss what may or may not be considered a reasonable expense. However, it is often necessary to employ an attorney who is familiar with both family law and how businesses are structured to ensure that the business owner's income is fairly reported. The attorneys at the Law Offices of Brandon R. Ceglian can help you navigate this complex legal landscape.

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Brandon Ceglian

Brandon Ceglian's practice focus is family law, landlord-tenant law / real estate, civil litigation, criminal / DUI, and collections. View Attorney Profile

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J. Adam Beckman

Adam Beckman’s areas of focus are family law, adoptions and prenuptial agreements, and criminal law/DUI. View Attorney Profile

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Domenic Nicotra

Domenic Nicotra’s practices primarily in the areas of Landlord-Tenant, Family Law, Criminal, Protection Orders, and Civil Litigation. View Attorney Profile

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Daniel J. Zolnikov

Daniel Zolnikov practices in the areas of HOA, debt collections, landlord tenant, civil litigation and construction law. View Attorney Profile