What you need to know about dividing a business in a Maryland divorce
If you and your spouse are considering divorce or are going through the divorce process, one of your biggest concerns is what could happen to your business. Whether one or both of you run the business, the community may have an interest in it, and it will likely need to be considered in the division of the marital estate.
A divorce can be a difficult process to navigate with or without a business to divide, so don’t do it alone. Protect your financial security by scheduling a consultation with Howard County property division lawyer Fred Coover by calling (410) 553-5042.
In the meantime, continue reading to learn more about how a business might be treated and divided during a divorce.
First things first: is your business marital property?
Maryland is an equitable property state which means that in a divorce, marital property must be divided equitably or fairly between the parties. Although the division must be equitable, it might not be 50/50 or a straight line down the middle of each asset because various factors are weighed when dividing property.
Marital property is all property acquired by one or both parties during the marriage, regardless of whose name is on the title or who purchased it. However, marital property doesn’t include:
- Property acquired by inheritance or gift
- Property acquired by a spouse before the marriage
- Property excluded by a valid agreement (such as a prenuptial agreement)
- Property that’s directly traceable to any of those sources
If the property falls under those exceptions, it’s considered separate property.
A business created or acquired during the marriage is usually considered marital property, but it’s subject to the same separate property exceptions such as if the starting capital was from separate property.
Similarly, if the business was created or acquired before the marriage, it generally won’t be considered marital property.
However, if a separate property business increases in value during the marriage, the Court could designate its increase in value as marital property.
The Court may also find that there’s a marital property component to the business. This is often based on the operating spouse’s efforts in the business if the non-operating spouse made contributions to the business during the marriage or if marital assets were used to grow or assist the business.
The spouse claiming a separate property interest in a business, either wholly or partially, bears the burden of proving that it’s separate property, so they’ll need to keep clear accounting and records to prove that claim, especially if funds were commingled.
Valuing the business
As with all property that’s divided in a Maryland divorce, an appropriate and supported value must be assigned to the business.
Just as with real property, a professional business appraiser or forensic accountant must be hired to review the business’ books and calculate the business’ value by considering the tangible and intangible assets, liabilities, the business’ reputation (sometimes called “goodwill”), and how the business compares to other similar businesses.
Business valuation can be a very complex and involved process. In a collaborative divorce, spouses might agree to jointly hire an appraiser to reduce costs, but in litigated divorces, both sides usually hire their own expert to conduct a business valuation and to discredit the other expert’s report.
A lot of legal strategy goes into valuing a business, and you’ll need a reputable expert in the area.
Mr. Coover has extensive experience with dividing businesses in a divorce, both when representing the operating spouse and the non-operating spouse, and has well-established relationships with many forensic accountants who can increase your chances of a desirable outcome.
How the ownership and operation affect the division of a business
The legal formation or registration of a business can be a relevant factor in determining how the business should be valued, as will the roles of each spouse in the business.
Typically, regardless of the legal structure of the business, the spouse who primarily operated the business will be awarded the business, and they’ll either buy out the other spouse, or the business’ value can be offset by another valuable asset.
Sometimes the buyout payment can be ordered to be paid in one lump sum, other times it might be paid over time.
If there aren’t sufficient assets to offset the value of the business, or if the spouse who is being awarded the business won’t be financially capable of buying out their spouse, the business might need to be sold.
When the business is owned by one party, it generally makes the division easier because there are no interests and contributions of third parties to consider. Instead, you’re looking at when and how the business was formed and which spouse primarily operated it.
Even if only one spouse “owned” the business or was the only person registered to it, the other spouse may have worked for the business or made other direct contributions to it, or they made contributions in other ways such as taking care of the children and the home so the operating spouse could build the business.
These contributions are considered by the Court when valuing and dividing the marital estate.
Partnerships and corporations
In some cases, a couple runs a business together under a legal partnership and they both want to continue to be involved. If they’re still on friendly, cooperative terms, there’s no reason they can’t continue operating the business together after the divorce.
However, this generally only occurs when the parties reach an agreement on the issue such as in a collaborative divorce — it’s unlikely that the Court would order that the parties continue to operate the business together, and one spouse will be awarded the business.
When the business is owned by one or both spouses and one or more third parties, things can get much more complicated. The Court will now need to consider stock shares, percentages of ownership, agreements, and capital and working contributions by the third party among other things.
How to reduce the risk of losing your business
If you have your own business and are planning to get married, it’s wise to protect your business or your interest in a business with a prenuptial agreement. If you’re already married, you can discuss a postnuptial agreement with an experienced attorney, then present the idea to your spouse.
These agreements can make considerations for all scenarios, including how income earned from the business during the marriage is treated, how the business will be treated if separate and marital funds are used, and ultimately what will happen to the business in the event of a divorce.
There are time restrictions and several other laws and issues that must be considered for a prenuptial and postnuptial agreement, so don’t wait to discuss one with an attorney.
Concerned about business division in a divorce? Call Fred Coover.
Fred Coover is highly experienced with successfully handling business divisions in Maryland divorces. To find out where you stand, schedule a consultation now by calling Coover Law Firm, LLC at (410) 553-5042.