Owning and operating your business can be a very challenging experience. It costs time, energy, money, and emotions to grow your business into a force within its market. The reward, however, makes it all worthwhile. A successful enterprise is a way to offer stability for yourself and an investment in the future of your family. Whether you want to pass the business on to your children one day, sell it off for your retirement, or simply use it to share a common interest with your spouse, your business is more than just a business.
Unfortunately, not all families last, and you may find yourself in the midst of a divorce. Your business and the divorce seem like two separate entities, but they are, in fact, tied together. In New York divorces, spouses are entitled to an equitable distribution of assets. This includes businesses that may or may not have started during the marriage. Spouses, regardless of financial contribution, are entitled to business assets. This is because the law considers how the marriage contributed to the overall success of the business. For example, perhaps your spouse did not work because they took care of the children. This gave you more time to focus on the business. That is still an investment in the company’s success.
Before you worry about losing your business, splitting it with your spouse, or your business taking a financial hit, you should know that there are ways to be proactive. There are five ways that you can protect your business from being sold or dissolved during your divorce.
You may not enter your marriage thinking that it will ever end. In fact, that is usually the last thing on your mind. If, however, you started a business prior to your marriage, you may wish to consider a prenuptial agreement. These legally binding agreements are signed by both spouses before the marriage. They dictate how certain assets will be divided in the event of a divorce. This can specifically list the business and predetermine what happens to it. Often, these agreements will establish concessions, such as one spouse gaining the business while the other gains the home.
Postnuptial agreements are the same type of agreement. However, they take place after the couple is married.
If you and your spouse own a business together, that can make for a very complicated process. One of you may try to gain control of the business from the other. In a buy-sell agreement, it can specifically talk about how business ownership would settle in a divorce. This could include one spouse buying out the other, restricting voting rights within the company, or allowing other partners the opportunity to purchase from one spouse.
There are many ways to prove that the business should be considered a part of the marital assets. One method to limit this connection and prove that one is independent of the other is to maintain good financial record-keeping. Ensure that business assets and personal assets stay separate from one another. The fewer connections that commingle the two together, the better the chances are that the business will remain a separate entity.
As the head of the business, you set the salaries based on your profits. You work hard, and so you should be rewarded, so long as it fits your business model. In addition to providing you with stable finances, it can also help protect your business. Taking a smaller paycheck to leave more money invested in the company may seem like a noble idea. However, it also limits the finances that are coming into your family. In this situation, a spouse could argue that the family was deprived of the success of the company during the marriage. They would then have the business appraised for its increased value. They would also have a right to seek that value as part of the divorce settlement.
If you truly want to keep your business, you need to be ready to pay for it. This can take many different forms. The first way is to simply give up other marital assets with the same value to your spouse as they would gain from the business. A second way is to pay your spouse, over time, the value of the business they are entitled to. You would need a court agreement for this. Either way, it helps you hold on to the business.
The optimal way to protect your business in a divorce is to use a prenuptial or postnuptial agreement. When spouses can implement these agreements, there is already an understanding in place for what will happen. They can always be modified or changed. However, they allow the couple to talk about the business in an equitable and amicable way.
A business is subject to equitable distribution in New York. Each spouse makes some contribution to the business, either through financial investments or actions that help support it. There will be a determination of the value of these contributions. A spouse may contribute through action and the support of the other spouse by taking on other family roles. These allow you to focus on the business. This is considered to be adding value.
New York is not a 50/50 state but an equitable distribution state. If a business was created during a marriage, or if it was created prior to the marriage and the value of it increased while the couple was married, then the business is considered marital property. It is subject to equitable distribution regardless of the financial investment or ownership status of your partner.
Appraisers are used to determine the value of a business during a divorce. A common approach is to use an income approach. Using this method, the business’s worth is determined by its current value compared to its potential future earnings. Another way is to use fair market value. This compares the business to others like it within the market to determine a fair interest value.
Bringing divorce and business ownership into the same conversation can be worrisome and stressful. It likely brings up more questions and answers. If you own a business and are facing a divorce, let an attorney with the knowledge and experience answer your questions. At Trotto Law Firm, P.C., our team can help you protect what you have worked so hard to build. Contact our offices today.
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