Splitting a Family Business in Divorce

Going through a divorce is hard regardless of the circumstances. However, when you have to split a family business in the divorce, it can be even more difficult. This is because the business is more than just a piece of property. It’s part of your heart and soul. It’s also your income.

When someone files for divorce, it can often feel to the business owner like they are going to lose everything that they’ve worked so hard to achieve. You need to decide who controls the business. You need to protect against the potential sabotage by your ex. You need to have a professional value the business and you’ll have to think about all of the tax considerations. It’s a lot to think about and a lot to handle. However, it’s possible to get through it when you have some help.

Understanding the Laws in Arizona

Anything that is purchased during the marriage is considered community property in the state of Arizona. If it is part of the community property, this means that it is subject to division. Each spouse will have a 50% equitable interest in the property. It doesn’t matter how the property is titled. All assets and liabilities will be fairly divorced. You might find that you run into a conflict between business laws and family laws. However, it’s important to keep in mind that in a community property state like Arizona, both parties will have ½ equitable interest.

What Should You Do?

The first thing you want to do is figure out the ownership structure of the business. If one of the spouses owns 100% of an accounting business, the non-CPA spouse may be disallowed from owning more than 50%. They cannot make decisions about daily operations, but they are entitled to being bought out of their interest in the company. The value of the business will be determined as of the day of the divorce filing.

What happens when a divorcing couple works together? What if you own and operate a business together, such as a restaurant? Things can get very tricky. Let’s say the husband in this case files for divorce. He does not have the right to kick the wife out of the restaurant. As a business owner, she has rights to information, control, and access to her business. The couple needs to figure out how they are going to run the business during their divorce process.

Often during a pending divorce, a temporary order for the property would be created until the divorce has been sorted out. This will give one of the spouses control of the property. If the judge in family court refuses to enter a ruling regarding the divorce, the spouse will need to determine whether to file another court action in civil court regarding the business or to continue daily operations. If the spouses are the only two owners of the business, the judge might enter an order that gives one spouse temporary authority over the other spouse to operate the business.

When there is a business involved, the judge may consider an order regarding the temporary control and operation of a business. Title 10 laws control what happens to the rights of the business owners. The family court judge can’t divest an owner of their rights.

Protecting Yourself Against Sabotage

Of course, there are cases when some business owners use their business accounts inappropriately. They may spend from their business account for personal purchases, such as clothes, cars, or vacations, for example. They might also use the money for attorney’s fees. To help solve this issue, there should be a temporary agreement regarding how the business will be operated and how the funds will be used pending the divorce.

Getting a temporary order or agreement in place when the divorce is pending is essential. This is true even if it might seem difficult and if you have to file something in civil court or remove one spouse from the bank account. Protecting the business should always be a top priority. As mentioned, sometimes a spouse will try to use the business’s money as their own personal bank account.

However, they could be doing other things in an attempt to sabotage the business. They might stop working or make mistakes as a means to push the value of the business down. In hotly contested divorce cases, it could be a good idea to work with a business attorney. They can offer advice about Title 10, the operating agreement or bylaws, and issues concerning any third parties involved in the business. The business attorney could also help with issues related to debts, creditors, bankruptcy, or any breach of contract issues.

Valuing the Business for Divorce

One of the most difficult assets to value is a business interest. If the business was acquired during the marriage with joint funds, it is community property. You will need to look at the date of the marriage and the date the business interest was acquired. When determining the value of an asset being divided in the divorce, the value used will be the fair market value at the date of the separation.

When valuing, they do not look to determine how much it will cost you to replace the items, but how much that particular item would sell for today. Sometimes, the fair market value is easy to determine. Supplies and fixtures tend to be easy to value. However, other parts of the business can be more difficult to value. It might require a professional to provide the valuation. Factors used to determine whether the property is considered separate or community include the source of the funds used to start the business, financial and labor-related contributions to the business from either spouse during the marriage, and the date of the marriage. Keep in mind that if the business interest was acquired before the date of the marriage, or if it was acquired with separate funds, it should be considered a separate property rather than community property. However, just because the business interest might have been acquired before marriage doesn’t mean that the other party will not get any value from it.

Work with an Attorney

Divorce is always difficult whether you have a family business or not. Make sure that you work with a qualified divorce lawyer who can help you no matter how complex your case might be.