By David Badanes and Max Glick
Divorce is already a complex procedure, which can be made more complicated if the spouses own a business together. In most situations, the business will have to be valued by a neutral expert. In addition, the divorcing couple will need to decide who retains the business after the divorce.
In some situations, one spouse may retain full control of the business after the divorce. This typically happens if that spouse was the one who either founded the business or is the one who, prior to the divorce, took care of most of the day-to-day running of the business.
In some cases, an end to a marital relationship does not mean an end to the business partnership and the ex-spouses continue to work together. Although, this is rare, just because there is a divorce, does not mean that the two adults cannot work together to make sure that the business continues to thrive. For those who choose this option, it is because each spouse brings value to the business.
Finally, in some instances, the divorcing couple will choose to sell the business. This brings its own set of questions, for example: (i) how are the net proceeds of the sale distributed; (ii) what are the tax consequences; and (iii) can one of the spouses start a new business that essentially does what the old business did – but, just under a new name?
Here are three things to know concerning getting a divorce and owning a joint business:
1. Distribution of Income
While the divorce is ongoing or if the divorcing couple decide to retain the business together, the issue of how to distribute the company’s business should be resolved. As with most issues in a divorce, if the spouses cannot agree on how to distribute the company’s income, then a judge may issue orders on how the distribution of income should be handled. In many instances, a judge will appoint a third-party, called a receiver, who will be in charge of the distribution of income in the business. Note that a receiver will often be entitled to a large fee and could become a large expense of the business/divorce.
2. Control of the Business
Whichever spouse has more influence and oversight in the business will most likely be the one who will retain control after the divorce has been settled. However, this can be difficult to determine as one spouse may deal with multiple sides of the business. For example, a spouse may be in charge of meeting with clients, soliciting new clients, and marketing the business. While the other spouse may be involved in the behind-the-scenes operation of the business such as payroll, budgeting, etc. One way to determine the control of the business is for the spouses to be up-front with what aspects of the business they manage. If the spouses cannot agree, one may file with the court to retain exclusive authority over the business. If this is the case, the filing spouse will need to provide documentation which demonstrate their control such as financial records with their name, and/or operating arrangements.
3. Division of the Business
After the conclusions have been reached on the distribution of income of the business and the role each spouse plays in the business, the question becomes: How do the spouses divide the business? The spouses may decide keeping the business is not in their best interest and seek a buyout therefore splitting the proceeds, or closing the business and splitting the assets. Another option is for one spouse to buy out their ex’s share in the business. Alternatively, the ex-spouses might be able to work out their differences and continue to run the business as partners, albeit no longer married.
David Badanes, Esq. and the Badanes Law Office, P.C. have helped numerous divorcing couples with the division of both their divorce and their mutually-owned business. Prior to becoming an attorney, David Badanes operated a business and currently, he operates a business with his wife. David Badanes knows the challenges of owning a business and the challenges of splitting up a business or buying/selling one.
If you are considering getting divorced and own a business with your spouse, contact David Badanes and the Badanes Law Office, P.C. at 631-239-1702 or email at firstname.lastname@example.org. The Badanes Law Office has offices in Northport, Suffolk County and Uniondale, Nassau County.
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