Lots of your personal assets may divided in a divorce. You and your business associates may also face some surprises and complications when your business interests are part of marital property division.
Status of business
The first step is determining whether the private business interest is a marital asset or separate property. In addition to Michigan law, factors typically include whether the business interest was owned before marriage, the source of funds used to purchase the business and either spouse’s financial contributions or personal efforts for the business during their marriage.
Next the business should be valued. This is usually a major cause of disagreement when the business is not publicly traded. When the parties disagree, litigation may be costly and time-consuming. Spouses, however, should have their own independent qualified valuation professional to assist them.
The asset approach, market approach and income approach are the three ways to value the business. These may exclude some discounts that are inappropriate for divorce.
After the business is valued, the spouse should determine what happens to their business interest. These usually include three options.
Buying out the other spouse’s interest
This is the most popular option. But it may be impermissible in some situations, such as a law practice, where a licensed attorney must own the practice.
These transactions are usually not treated as a sale for tax purposes if it meets specific requirements. But the purchasing spouse may owe more taxes if their business interest is later sold to a third party.
If a buy-out is not possible, the next popular option is selling the business and dividing the assets equally. A business sale, however, may not be viable without a court order if one spouse wants to continue the business.
Busines sales depend on numerous conditions such as marketability, profits, and economic conditions. It may take years to complete the sale. Spouses must continue to manage the business until it is sold. They need to agree on a sales price and how it will be divided.
The least-used option is for spouses to continue to jointly manage the business after their divorce. This arrangement obviously involves emotional and psychological challenges.
Spouses may also agree that one spouse will have the primary management responsibilities. The other spouse will then receive a percentage of the future business profits to fulfill their share of martial assets.
Couples should execute a formal written agreement if they choose this option. This relationship should be treated as if they were unrelated and independent business investors.
This process becomes more complicated with debt, third-party agreements, and other owners. Each spouse should seek legal advice on their options and any agreement.