When you start your own business, you are taking a big risk. You are putting an enormous amount of time, emotional energy, and money into a dream with no guarantee that you will see that money again. However, if it works out, you have something that you can claim as your own: a source of personal pride that you may one day pass on to your children.
Unfortunately, divorce can throw a giant monkey wrench into anyone’s best-laid plans. The reason is that when couples divorce in North Carolina, each spouse is entitled to his or her equitable share of all marital property. So does your small business have to be sold off and divided in a divorce?
Separate or Marital Property?
The first issue regarding a small business is whether it should be classified as separate or marital property. If the business is separate property, then it remains with the spouse who came into the marriage with the business or entirely used separate property to start the business. This is important. In order to be deemed separate property, a small business must be exclusively funded using separate property. If a business is separate property, then the court cannot touch it as a part of its equitable distribution or property.
However, it is highly unlikely that a small business—especially one started during a marriage—will be entirely classified as separate property. In reality, it is probable that the other spouse made valuable contributions to the business or marital property was used to invest, to fund, or to pay expenses of the business.
This makes the valuation of the business the next consideration. Businesses can be incredibly difficult to value. This is why attorneys and courts rely on experts to provide business appraisals in accordance with accepted business valuation methods. Notably, there will generally be a wide difference in what each party will try to convince the court a business is worth.
Does a Business Have to Shut Down?
When a business has been valued, the parties and the court can then explore options on how to treat the business when dividing property. This does not necessarily mean that a business has to be sold or shut down.
One common choice to keep the business intact is for one spouse to buy out the other spouse’s interest. For this to be a viable option, the marital estate must be large enough to compensate the spouse being bought out, or the spouse seeking to retain the business must have enough separate property to compensate the other. Another option is to agree to a structured buyout or payment plan for the other spouse’s interest.
Another option is for the small business to continue with each spouse retaining his or her interest in the business. This is an option where one spouse continues to run the business, while the other earns his or her share of profits, shares, or dividends over time. However, this arrangement only works for a couple that separates amicably and is able to peacefully co-exist.
The third optionis to sell the business. This is an emotionally difficult decision and can be logistically tricky, because small businesses can be hard to sell. Further, it may take a long time to sell and the business may not receive the quality offers that you believe the business is worth.
New Direction Family Law
If you own a small business and are getting divorced, let New Direction Family Law help you. Property division and business appraisals can be incredibly complex, and it is important that you have a smart, experienced advocate on your side. We know how hard you have worked to build your business and want to make sure that you are in the best position to preserve what you have worked for. Our firm serves Wake, Johnston, Durham, and surrounding counties. Call New Direction Family Law at (919) 719-3470 to schedule a consultation or contact us at our website.
Sarah J. Hink
New Direction Family Law