How does a Divorce Impact Your Business?
For many business owners, a business is more than simply an asset. It may represent years of work, a primary source of income, a significant component of the marital estate, and an important part of the owner’s financial future.
Understandably, one of the first questions a business owner may have when facing divorce is: What happens to my business?
The answer depends on numerous factors, including when the business interest was acquired, whether some or all of the interest constitutes marital or separate property, whether its value changed during the marriage, the respective contributions of the spouses, and whether a valid prenuptial or postnuptial agreement addresses the business.
New York is an equitable distribution state. This does not mean that every marital asset is automatically divided equally. Instead, marital property is distributed equitably based upon the circumstances of the marriage and the factors established under New York law.
When a privately held business, professional practice, partnership interest, or other closely held company is involved, classification and valuation can become significant issues in the divorce.
Is a Business Considered Marital Property in New York?
One of the first issues in a divorce involving a business is whether some or all of the ownership interest constitutes marital property.
Under New York law, marital property generally includes property acquired by either spouse during the marriage and before the execution of a separation agreement or commencement of a matrimonial action, regardless of the form in which title is held.
Accordingly, an ownership interest acquired during a marriage may constitute marital property even when only one spouse’s name appears on the company’s ownership or organizational documents.
That does not necessarily mean that the other spouse will receive half of the company or become an owner of the business.
Classification of the business interest, determination of its value, and equitable distribution of the marital estate involve separate analyses. Each depends upon the particular facts and circumstances of the case.
What if I Owned My Business Before We Got Married?
A business interest acquired before marriage will generally begin as the owner’s separate property.
However, the treatment of any increase in the value of that interest during the marriage may require additional analysis.
Under New York law, appreciation in separate property may, under certain circumstances, be considered marital property to the extent that the appreciation resulted from the contributions or efforts of the other spouse.
Those contributions are not necessarily limited to direct employment by or involvement in the company.
For example, the court may consider both direct and indirect contributions made by the spouses during the marriage when determining their respective rights to marital property.
As a result, divorces involving a premarital business may require an examination of the business interest’s history, its value at relevant points in time, and the circumstances surrounding any appreciation during the marriage.
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Practice Areas
DIVORCE LAW
FAMILY LAW
Does My Spouse Automatically Get Half of My Business?
No. New York follows the principle of equitable distribution, rather than automatically dividing every marital asset equally.
Courts consider numerous statutory factors when determining the equitable distribution of marital property. Depending upon the circumstances, these can include the duration of the marriage, the income and property of each spouse, contributions to marital property, future financial circumstances, tax consequences, and other factors established by law.
New York law also permits courts to consider the economic desirability of retaining an interest in a business, corporation, or profession intact and free from a claim or interference by the other spouse.
Accordingly, a court does not necessarily have to divide ownership of the business itself between the spouses.
Depending upon the circumstances of the case, a business interest may remain with one spouse while the value attributable to the marital estate is addressed through the overall equitable distribution of marital property.
How Is a Business Valued During a Divorce?
When a business interest is relevant to equitable distribution, determining its value may become an important issue in the matrimonial proceeding.
Valuation of a privately held business can be considerably more complicated than valuing assets with readily ascertainable market prices. The appropriate analysis depends upon the nature of the company, the ownership interest involved, the available financial information, and other circumstances specific to the case.
In matrimonial litigation, attorneys may work with qualified valuation professionals, forensic accountants, or other financial experts when expert analysis is appropriate.
Depending upon the circumstances, valuation-related discovery may involve records such as:
- Business and personal tax returns;
- Profit-and-loss statements;
- Balance sheets and other financial statements;
- Bank records;
- Payroll information;
- Accounts receivable and accounts payable;
- Information concerning business debts and liabilities;
- Ownership agreements and organizational documents;
- Information regarding tangible and intangible assets;
- Historical earnings information;
- Compensation and distributions; and
- Other financial records relevant to the issues before the court.
The existence of a particular document or financial characteristic does not, by itself, determine the value of a business. Valuation is highly fact-specific and, when disputed, may require expert testimony and judicial determination.
Can My Spouse Obtain Business Records During the Divorce?
Business records may be subject to disclosure when they are relevant to issues in the matrimonial proceeding, including equitable distribution, maintenance, child support, or the determination of income.
The scope of appropriate disclosure depends upon the facts of the case and the issues being litigated.
For owners of closely held businesses, discovery may also implicate confidential or commercially sensitive information. Questions concerning the disclosure, confidentiality, or use of particular business records should be addressed with matrimonial counsel and, where appropriate, other qualified professionals.
Does My Business Have to Be Sold Because of a Divorce?
Not necessarily.
New York law recognizes the economic desirability, in appropriate circumstances, of retaining an interest in a business, corporation, or profession intact and free from a claim or interference by the other spouse.
A court may therefore address the marital value associated with a business without necessarily requiring that ownership of the company itself be divided between the spouses.
Depending upon the circumstances, equitable distribution may involve a distributive award or the allocation of other marital property rather than a division of the business ownership itself.
How a particular business interest should be treated is dependent upon the facts of the case, the composition of the marital estate, and the applicable law.
What if Both Spouses Own the Business?
A divorce may present additional issues when both spouses have an ownership interest in the same business.
In addition to questions concerning equitable distribution and valuation, the existence of joint ownership may raise separate legal, financial, tax, or corporate issues that extend beyond matrimonial law.
The parties’ respective ownership interests, governing agreements, and other relevant circumstances may affect the issues that arise during the divorce.
Where necessary, matrimonial counsel may coordinate with corporate counsel, accountants, tax professionals, valuation experts, or other appropriate advisors regarding matters outside the scope of matrimonial representation.
What if My Spouse Worked In the Business?
A spouse’s involvement in a business may be relevant to the equitable distribution analysis.
For example, a spouse may have participated in administration, bookkeeping, operations, marketing, client development, or other aspects of the company. A spouse may also claim to have made indirect contributions during the marriage that affected the other spouse’s ability to devote time and effort to the business.
New York’s equitable distribution law permits consideration of both direct and indirect contributions to marital property.
The relevance and weight of any particular contribution depend upon the circumstances of the marriage and are determined on a case-by-case basis.
Can Business Income Affect Maintenance or Child Support?
A business may be relevant to a divorce not only because of its potential value as an asset, but also because of the income associated with it.
Determining income can be more complex when a spouse owns or has an interest in a closely held business than when a spouse receives only traditional W-2 wages.
Depending upon the circumstances, the matrimonial proceeding may involve examination of compensation, distributions, business financial records, tax returns, and other information relevant to determining income under New York law.
The treatment of particular payments, expenses, deductions, distributions, or other financial items for matrimonial purposes depends upon the facts and applicable law and should not be assumed solely from their treatment for accounting or tax purposes.
Can a Prenuptial Agreement Address a Business?
A prenuptial agreement may address the parties’ respective rights concerning a business interest in the event of divorce.
Depending upon its terms, an agreement may address issues such as the classification of a business interest, appreciation in its value, and the parties’ respective property rights.
The validity, enforceability, interpretation, and effect of any prenuptial agreement depend upon the particular agreement and the circumstances surrounding its execution.
Individuals considering a prenuptial agreement involving a business should consult matrimonial counsel. Advice regarding corporate, tax, estate-planning, or other non-matrimonial consequences should be obtained from appropriately qualified professionals in those areas.
What About a Postnuptial Agreement?
A postnuptial agreement may likewise address certain property rights between spouses during an existing marriage, including rights relating to a business interest.
As with a prenuptial agreement, the legal effect of a postnuptial agreement depends upon its specific language, execution, and applicable New York law.
A matrimonial attorney can advise regarding the matrimonial aspects of such an agreement. Separate legal, tax, accounting, corporate, or estate-planning advice may be appropriate depending upon the circumstances.
What Should a Business Owner Know When Facing Divorce?
A divorce involving a business can present issues that do not arise in every matrimonial matter.
Among other things, the proceeding may require consideration of:
- Whether the business interest is marital, separate, or a combination of the two;
- Whether appreciation in a separate-property interest is at issue;
- The value of the relevant ownership interest;
- The availability and scope of financial disclosure;
- The relationship between business income and support obligations;
- The effect of any prenuptial or postnuptial agreement; and
- How the business interest fits within the equitable distribution of the marital estate as a whole.
Business owners should discuss these issues with matrimonial counsel early in the process so that the legal issues affecting the divorce can be identified and evaluated.
A matrimonial attorney’s representation regarding a business in divorce is distinct from legal, accounting, tax, investment, or operational advice concerning the business itself. When those issues arise, consultation with appropriately qualified professionals may be necessary.
Protecting Your Interests in a New York Divorce Involving a Business
The existence of a business does not automatically mean that the company must be sold, divided between the spouses, or transferred to the non-owner spouse.
It does mean that questions concerning ownership, classification, valuation, income, and equitable distribution may need to be carefully addressed as part of the matrimonial proceeding.
At Douglas Family Law Group, PLLC, our New York matrimonial attorneys represent individuals in divorce matters involving closely held businesses, professional practices, substantial assets, and complex financial issues.
If you own an interest in a business and are considering divorce—or are already involved in a matrimonial proceeding—contact Douglas Family Law Group to discuss how New York matrimonial law may apply to your circumstances.
Please Note: This article is provided for general informational purposes concerning New York matrimonial law only. It is not intended to provide business, corporate, accounting, tax, investment, valuation, or other professional advice, and should not be relied upon for those purposes. The treatment of a business interest in a divorce depends upon the specific facts and circumstances of each case.
