Keeping Your Business in a Divorce
Arizona is a community property state, meaning that all debts and assets acquired during a marriage will be split evenly between a married couple if they divorce. Although a business is a source of income, its value can be treated like any other asset during a divorce.
Do I Get Half of my Spouse’s Business in a Divorce?
If your spouse started their business during your marriage, you may be entitled to a community property share of it. The same applies to a business purchase, unless it was purchased entirely with separate property funds (i.e., a gift or inheritance). Even if the business was owned before the marriage, any increase in value could be split between the spouses upon divorce. This is because if one spouse is a homemaker, the time they spent cooking and cleaning allowed the business-owning spouse more time and energy to put towards the business. It would be unfair not to compensate the homemaker spouse for their time and efforts that indirectly helped the business.
Does a Spouse Have Rights to an LLC?
Just as with all types of personally owned businesses, your spouse is entitled to a community property share of a business that was created or increased in value during the marriage. Your spouse will either need to be kept on as a business partner, or you will need to buy your spouse out of their share of the business.
What Impact Does a Divorce Have on an LLC?
Having your business registered as an LLC has tax advantages while operating, but can present complications in a divorce. This is especially true if both spouses are listed as owners of the LLC, even if only one partner is actually running the business. The benefit of registering a business as an LLC is that the IRS will disregard singly owned entities, allowing business owners to pay themselves and pay taxes after.
If a married couple divorces and splits ownership, it technically is no longer a single owner LLC. However, the IRS has created an exception to this rule for this very purpose. For a community-owned LLC to be treated as a singly owned entity after divorce, it must meet three requirements: (1) the LLC is entirely owned by the husband and wife and is governed by community property laws; (2) for IRS LLC qualification purposes, no other party is an owner of the business; and (3) the business is not considered a corporation under federal law.
Can I Sell My Business While I Am Getting Divorced?
Selling your business during a divorce may be a simpler way to divvy up all your assets. The proceeds of the sale will be split between the couple, and all other assets can be divided evenly without considerations for the value of the business. However, there will be a freeze on your assets during a divorce. Your spouse may file a restraining order to prevent you from selling the business until the divorce is finalized. You will need permission from the court before proceeding with a business sale during an active divorce. Selling your business while getting divorced is something that can be filled with many pitfalls. Best practice is to seek the assistance of an Arizona Divorce Lawyer to assist you with your needs.
How Does a Divorce Impact my Business?
If you and your spouse run the business together, this will likely create a tense environment at work. If your spouse’s role is relatively minor, you may be able to minimize their role or let them go, but more equal partners may be better off selling the business and splitting the proceeds.
If your spouse does anything to hurt your business during the divorce, e.g., sabotaging your relationships with vendors and having outbursts in front of customers, you may be able to get a restraining order to prevent these types of behaviors. Document these behaviors whenever possible and consult an attorney for advice.
Strategies for Keeping Your Business
- Hire a Business Evaluator: You and your spouse may have an inaccurate idea of what the business is worth. You should hire a professional, neutral, third party to estimate the value of your business so it can be more easily handled during the property division portion of your divorce.
- Pay Yourself Fairly: Some business owners pay themselves a small salary and reinvest profits into growing the business. Paying yourself a fair salary is a good way to make sure that your spouse isn’t awarded half of a value increase that you sacrificed to build.
- Minimize the Role Your Spouse Plays in the Business: Your spouse may be awarded more of the business if they also have a lot of business responsibilities. You may not want to fire your spouse before a divorce, but you can at least start reducing your spouse’s assignments.
- Pay Out Gradually: If your spouse is awarded part of your business, you will either need to pay your spouse a lump-sum payment or monthly payments. While there could be certain factors that make your case better for lump sum payment, choosing monthly payments will leave more funds available for growth and emergencies.
- Use Your Other Assets in Negotiations: It may be easier for you to keep 100% of your business in exchange for other marital assets. You may be able to cede your community share of a house, car, or other significant asset in exchange for your spouse’s interest in the business.
Will Contacting an Experienced Divorce Attorney Help my Chances of Keeping my Business?
If you own your own business, you automatically have a lot on the line in a divorce. Losing a portion of your business can affect your financial situation not only in the present, but for years to come. Whether or not your spouse is represented by an attorney, you need a skilled attorney to advocate for your interests and protect your business. The first step is to consult with a family law attorney.
The experienced divorce attorneys at My Arizona Lawyers offers free phone consultations to discuss your rights and strategize your best outcomes. A knowledgeable family law attorney will guide you through your options and provide you with a competitive, affordable quote for representation. Call (480) 833-8000 to get scheduled a free consultation today.