Divorcing takes a lot out of you mentally and emotionally, in general. When you own a business it presents an entirely new area of concern to keep you awake at night. Will your spouse be entitled to part of your company? Will you have to sell anything off? How are you going to manage things if your spouse somehow receives part ownership in a settlement when you could not even live together?
These are complex issues that require the guidance of an attorney – and probably a good CPA – to review. Your divorce does not have to mean the end of the world for your business. You just have to understand what your options are and what some of the pitfalls may be so that you are prepared.
What are my options for keeping my business in a divorce settlement?
You and your spouse can work out any agreement you wish, as creatively as you wish, within reason. Exceptions may apply if there is a premarital agreement in place, or if the company is beholden to shareholders. However, if a private business is deemed a marital asset, there are typically three avenues to explore.
Selling the business entirely
This is often the least appealing option to anyone who has struggled to build a successful business. Letting these entities go can feel like grieving a death. If it is a family business that was handed down to you, the notion of letting it fall into the hands of a stranger can create overwhelming animosity between you and your soon-to-be-ex. You will need to work with a number of people to sell the business:
- Appraisers and a CPA, to conduct an inventory and provide a business valuation
- A business broker, to find potential buyers
- A realtor and possibly an auctioneer, if the business cannot be sold as a whole
Co-ownership with your spouse
If you and your spouse are divorcing on good terms, there is no reason why you cannot continue to own and run your business. If one of you is more invested (emotionally, or even physically) in the day-to-day dealings, the other can become a silent partner. If you are equally invested, it can be “business as usual,” with a few caveats:
- Make sure to update your business agreement, and include an exit clause
- Clearly define the roles you will play in the running of the business
- Stand united when you speak to your employees, so they understand the new terms of the agreement and how it could affect them
Buying out your spouse's ownership interest
Unless you and your spouse can agree on an amount, just as with selling your business, you will need to have a proper business valuation conducted to make a fair buyout offer.
Note, too, that not all businesses have the ability to be shared. Depending upon the nature of your company, a professional license or other special credentials may be required to conduct business in your field. If your spouse does not possess the same qualifications, he or she may be barred from owning the business, yet still hold an ownership interest.
What are the tax implications of owning a business during divorce?
Even if your spouse did not directly work for your company, he or she will have a financial interest in at least part of it. One complication involves how taxes will be handled, should you have to make some sort of division of the company to fulfill a settlement agreement.
The good news is that transfers of ownership interest in a business that result from a divorce fall under the tax-free transfer rule. You pay no federal income or gift tax on the property transfer provided it occurs:
- During your separation
- At the time of your divorce
- Within a year after your date of divorce
- Six years after your date of divorce provided the transfer is pursuant to the terms of your divorce decree
The spouse who receives the transferred property will be responsible for taking over the existing tax basis and holding period on that asset.
If your property settlement involves the transfer of stock in your company to your former spouse, you essentially minimize your own tax burden as he or she then becomes responsible for any capital gains or losses when the shares are sold.
Divorce can become much more complicated for some couples simply due to the marital assets they hold. If you or your spouse own a business and you have decided to proceed with divorce, you will need the knowledgeable guidance of a divorce attorney to create a fair property settlement agreement.
Tom Holland is a caring family law attorney with decades of experience handling complex financial matters. Schedule your confidential divorce consultation in York, Lancaster, or Chester County in Mr. Holland's offices located in Fort Mill on Gold Hill Road, or Rock Hill on Oakland Avenue by calling 803-219-2630, or feel free to reach out to him through his contact page.