Dissolving a family-owned business in divorce

Marriage, like business, doesn’t always go according to plan.

For spouses who own and run a business together, divorce can be particularly messy. Not only is the dissolution of the marriage pending, but it could be that it is no longer viable to operate the business as it is currently set up. The good news is that the situation is much more common than many think; about half of all marriages end in divorce, and about 30 percent of all small businesses are owned by a married couple. While neither divorce nor business dissolution are particularly appealing, many couples have navigated this situation and obtained the best possible results moving forward.

This article will give a brief overview of the various ways to dissolve a business between ex-spouses. Because this area of the law is highly dependent upon individual circumstances, couples considering divorce should speak with an experienced family law attorney familiar with business ownership in divorce for help with their particular situation.

First, establish goals

In broadest terms, three options exist for a divorcing couple who own a business together. One is that the ex-spouses both remain a part of the business, maintaining current roles and ownership despite the divorce. This can be optimal under certain conditions, but is by no means the common solution. Another is that one ex-spouse buys out the interest of the other, by cash (possibly with bank or seller financing) or through alimony (spousal support). The third is that both ex-spouses sell the existing business and start fresh in business as newly single individuals.

Running a business together after a divorce can be extraordinarily difficult. That is not to say it is impossible. Remaining in business together after divorce works best if there are already clearly delineated job duties between the divorcing spouses. This is also a good option if the business is highly successful or maintains a steady income stream, meaning it would be difficult for one ex-spouse to buy out the other.

Finding the right legal path

For some couples, it simply is not workable to remain as business partners after divorce. Like divorce, there is nothing inherently wrong with dissolving a business relationship. However, like divorce, a business dissolution must be done properly to ensure each partner or owner is getting his or her due. This generally means dissolving the business according to the existing company agreement (partnership agreement, shareholders' agreement, etc.). Hopefully, a couple will have agreed on certain provisions regarding dissolution of the business when the business first began. Unfortunately, for some married couples, a company agreement is an afterthought at best. Dissolving a business or buying out another spouse without a prior agreement can be tricky - terms must be negotiated. As a last resort a court can dictate the dissolution of the business.

Obtaining a thorough valuation is of the utmost importance if the company will be sold, either to a third party or to one ex-spouse. If the business will no longer operate, then the business must still file all appropriate tax returns, liquidate assets, and be divided in the divorce proceedings. Who is responsible for outstanding debt of the business and filing and paying taxes can be negotiated in the divorce process. State law has various provisions regarding the proper dissolution of a business as well.

Myriad options available

The proper dissolution or distribution of business ownership depends on the business' organizational structure, the industry and many other factors. Because there are so many options available, a divorcing couple should speak to an attorney experienced in both business organizations and divorce before proceeding further.

Divorcing couples who own a business together are facing large life changes. Such changes require expert help. People considering divorce or business dissolution should contact an attorney immediately to begin discussing options.

Keywords: Divorce, business dissolution, small business owner.