If you are going through a divorce and own a business, you need to take careful steps to ensure your spouse will not be able to take what you worked so hard to build. You have put blood, sweat, and tears into your business, and your hard work has seen it thrive. Now that you’re getting divorced, it might suddenly seem like your time and diligence don’t matter.
However, who benefits from all your effort and work? Who has the right to your business? Dividing a business can be one of the most contentious and misunderstood parts of a divorce. An experienced Virginia Beach divorce lawyer will fight to protect your business.
How the Difference Between Marital Property and Separate Property in Virginia Affect Business Assets in a Divorce
Virginia is not a community property state and does not generally recognize community property. Instead, Virginia is an equitable distribution state. Equitable distribution of property in a divorce means that in order to divide the marital property, including business assets, the court must decide which property is marital and which is separate property.
The difference between marital property and separate property is not always clear when it comes to dividing marital assets during the divorce process. Even something like a business interest can be both marital and separate property. Understanding the meanings of each classification of property will help you seek a fair divorce settlement.
Marital Property
Marital property is any property that was gained during the marriage. For example, if you and your spouse buy a house together after you are married, your house may be marital property. This is generally the case even if only one spouse’s name is on the mortgage.
The same goes for businesses, credit cards, cars, and other assets purchased after you are married. Marital property generally includes assets acquired during the marriage, regardless of whose name is on the title or deed.
Separate Property
Separate property is any property that spouses owned before the marriage. If you owned your house or car before you got married, that property generally remains yours. However, if both spouses contribute to the property’s upkeep or improvements, it can become hybrid property, which means it has characteristics of both separate and marital property.
Courts may sometimes consider property jointly owned or hybrid property if both spouses contributed to its upkeep and maintenance during the marriage.
Inherited property is also separate. That means if a relative passes away and leaves property or money in their estate to you, that property remains yours. It is not subject to co-ownership in the marriage so long as it is not commingled with marital assets. Once commingled, it may lose its separate status.
This means that just because property is separate, it does not mean your spouse cannot claim an interest in it during the divorce. Business assets are good examples of property that may be separate but still considered part of the joint estate during a divorce.
While separate property generally remains with the original owner, the appreciation or income generated from it during the marriage may be subject to division if marital efforts contributed to its increase in value.
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Is a Business Considered an Asset in a Divorce?
The simple answer to this is yes: a business is considered part of your marital estate and may be considered marital property. It can be divided up along with other marital assets in a divorce. This happens regardless of whether the business is a family business started or acquired during the marriage or whether you were the sole business owner before you got married.
Your spouse’s specific ownership interest could have even been earned by working for the business. In a divorce, co-ownership is often assumed, and a business is only considered a separate asset in limited cases.
Even if the business was started before the marriage, if it appreciated during the marriage due to the efforts of both spouses, the increased value may be considered marital property.
When a couple divorces, each spouse must ask themselves important questions, such as whether they want ownership of the business, whether they want to work for the business, and whether they even care if the business continues. These are just a few questions that come up when dividing a family business during divorce proceedings.
What Are Some Types of Business Assets in a Divorce?
Every aspect of your business can be considered a marital asset in your divorce’s property settlement. This includes any debt your business may have racked up. The various aspects that commonly come up as business assets in a divorce include:
- Money
- Debt
- House
- Retirement accounts
- The business itself
- Patents and trademarks
- Vehicles
Your divorce attorney will fight with you to protect your personal assets from being considered part of the business. This is why it is so necessary to choose the right divorce lawyer to handle your case.
Money
Money involves all a business’s liquid assets. Any profits or cash for operating expenses that you have in bank accounts are money as far as the business is concerned and will be part of any business valuation.
Debt
Any debt tied to your business is also considered property during a divorce. This includes business loans, credit cards, lines of credit, and any other liens and liabilities that may exist against your business. Debt can help to offset the value of the business, as both spouses will be considered equally responsible for paying it off.
The House
Depending on your business, your house may or may not be part of your business debts. An LLC, for example, exempts personal property from being at risk from business debts. If, however, you use your house to leverage money for your business, such as using it as collateral for a business loan, it may become part of the business’s assets and market value.
Retirement Accounts
Retirement accounts, likewise, can be part of the business under specific circumstances. If you used a retirement account to fund your business, it may become part of the business assets in your divorce. If the retirement account is attached to the business, it can be part of the business and may be divided as part of the divorce.
Businesses
The business itself is at the core of the division of assets. It will have to be properly valued before the court can determine what portion of the business each spouse is entitled to receive.
Patents and Trademarks
Patents and trademarks have inherent value and can be part of property division and property settlement as part of the business or even separately. It is possible, for example, for one spouse to win the operational business but for the other to win rights to intellectual property like patents and trademarks.
Vehicles
Vehicles can be considered part of the business if they are used as collateral in a business loan or if it can be shown that they are used as part of the business practices. If, for example, you use your personal car to drive packages to the post office for shipping, it can be considered a business vehicle even if it is not formally part of a business vehicle fleet.
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How Does Virginia Being an Equitable Distribution State Impact You?
Because Virginia is an equitable distribution state under Virginia Code § 20-107.3, the courts do not automatically split everything down the middle. “Equitable division,” in this case, does not mean equal but fair. That means the courts will determine what is fair to each spouse.
It considers, for example, what each spouse needs to maintain their current standard of living. If one spouse lacks the ability or training to work, for example, they may be given more assets to maintain their lifestyle while they seek such training and work.
Property that can be issued to your spouse includes child support, alimony, physical property, and any share of the business the courts deem appropriate.
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How Are Business Assets Valued During a Divorce?
It is not uncommon in a divorce for the spouse who wants to keep the business to downplay its value while the one who just wants to profit to heighten the value. This is why it becomes important to have a third party place a real value on the business or do a business valuation. This helps to determine what share each spouse deserves.
Business Valuation Methods
When determining ownership stakes, a business’s value typically includes four elements: intangible property, tangible property, assets, and liabilities. Depending on the specific circumstances of the business, a business valuation may be conducted using various methods, such as the income approach, market approach, or asset-based approach.
Intangible Property
Intangible assets are difficult to value but form an inherent part of a business’s value. They include things like reputation and goodwill, customer relations, community participation, and the like.
Tangible Property
Tangible property includes machinery, equipment, inventory in stock, buildings you own outright, and any cash in bank accounts.
Assets
Any profit counts toward your assets, as does the value of stock or private shares held by any shareholder. An accredited appraiser will take all of this into account when determining the value of your business. Other assets may include accounts receivable, investments, and any other financial resources the business holds.
Liabilities
Liabilities come into play as well. Any rent you pay, mortgage you owe, equipment leases, lines of credit, regular services for which you pay, and other liens and debts are all types of liability that affect the business valuation. These liabilities must be subtracted from the total value of the assets to determine the net value of the business.
What Factors Help the Court Decide on the Value of Your Business Assets in a Divorce?
In Virginia family businesses, both spouses generally contribute, even if only one spouse owns the business. The other spouse will offer help when needed and intangible support, such as taking care of household needs, while the business owner can focus on the company. They help spread the word by marketing the company and offering moral support.
All of these things are important to the business’s operation, and the courts consider them all when dividing business assets in a divorce.
Because of this, many factors come into play as the court determines how to divide your assets. First among these is the spouse’s interest in the business and whether the spouses are business partners or one spouse has run the business largely on their own. There are several options for dividing business assets in a divorce.
One Spouse Gets Bought Out of the Business
The most common method for dividing marital business assets during a divorce is for the spouse who is more involved to keep the business while the other spouse is compensated for their ownership stake. In the case of a professional practice, for example, the accredited professional will maintain ownership of the business.
With this option, the more invested party maintains control of the business while the other party collects its fair share and moves on. Buying out your spouse’s business interest depends on the business valuation, the value of each equitable share, and the terms of the buyout.
Selling the Business and Splitting the Property
Another option is for the court to recommend or even order selling the business off to split the profits. A business can be sold to a third party that can then employ one or both spouses based on their contacts and skills.
Operating the Business Together as Partners
In rare cases, the divorced spouses can continue to operate the business jointly as business partners. This usually only happens in an uncontested divorce.
Dividing the Business
Finally, the spouses can agree to split the business. This generally only works in cases where there are multiple locations. For example, a restaurant or store with two locations can be split, with one location going to each spouse.
Depending on the agreement, the locations can be split to become two separate businesses (possibly still using the same name, depending on the specifics of the agreement) or can continue to be managed under one blanket company.
A qualified and experienced divorce attorney will help you make the right decision for your situation. It’s important to remember that if you have other business partners, they may also have a say in how this all plays out.
What Happens if There Was a Prenuptial or Postnuptial Agreement?
A prenuptial agreement or postnuptial agreement can be considered when a family business is divided. These agreements can save couples a great deal of trouble when the time comes to divide family assets by clearly laying out the groundwork for how your assets will be divided.
Most attorneys agree that a prenuptial agreement is wise if you have a business before the marriage. A postnuptial agreement should be created as part of your business establishment if you start the business after you are already married.
Either type of agreement should provide for the valuation of the business at the time of a divorce and resolve any potential issues regarding the division of property. Doing so in advance helps determine whether any part of the business is marital property and which parts, if any, are separate property.
How a Prenuptial or Postnuptial Agreement Can Simplify Matters
Without an agreement, the court will consider various aspects when dividing your business assets in a divorce. In this situation, all aspects of the business are considered in equitable distribution, play a role in the payment of alimony or spousal support, and have a part to play in child support.
The latter two are calculated based on each partner’s income, and ownership stakes in a business make a big difference. It is important to keep detailed financial records of each spouse’s involvement in the business and ensure that all ownership interests and terms of contract employment and formal employment are kept in writing and immaculately detailed.
When all of this is considered, having a detailed prenup or postnuptial agreement in place can save a great deal of time, expense, and trouble. The agreement will allow for an easy split of the property based on prearranged terms. These agreements can be drafted with the help of an experienced family law attorney who will help ensure that your interests are represented.
Is Your Business Under Attack Because of Your Divorce?
If you are going through a contentious divorce and feel like your business is in danger, you do not have to fight alone. The experienced divorce lawyers at Melone Hatley, P.C. are ready to work as your partners and protect your interests. We will help you fight for what is yours. We are pleased to offer legal advice, free e-books, advice videos, and a caring attorney-client relationship.
We put our clients first and will fight to protect you and your business assets during your divorce. Reach out today to schedule a free case review with one of our Client Services Representatives and read our client testimonials to better understand the service you can expect to receive when you work with us.
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