As briefly discussed in the introductory article Divorce and Property Division in Virginia, if you decide to divorce, you must deal with and resolve a number of issues, including settling your financial relationship with your spouse and dividing your marital property. What, then, is considered to be marital property in Virginia? As detailed in Virginia Code § 20-107.3, marital property includes any property acquired during the marriage, as well as any property acquired with earnings made during the marriage. And, regardless of whether the asset is titled in your, or your spouse’s, name only, or is jointly titled, such property is presumed to be marital.
In my recent article Planning For the Unplanned – Does Your Business Have an Exit Strategy? I list a number of common scenarios that may trigger a business’ exit strategy provision. Among those triggers is “divorce,” which led many to question “just what do divorce and my business have to do with one another?” Well, whether you and your spouse are co-owners of a business, it is solely your business, or you are among a group of individuals who own the business, at the end of the day, the value of that business may likely become an asset that must be dealt with during the divorce. Just how it will be dealt with, however, depends on the nature of the business ownership. Read on to learn what may happen when different types of business owners divorce.
You and Your Spouse as Co-Owners
In the event that you and your spouse are the only co-owners of the business, the fact that it is jointly titled means that a Virginia Court has the authority to not only determine the business’ value, but also to order the division of the business, or the sale of the business and the division of its proceeds. Of course, as the idea of dividing an ongoing business in half doesn’t make sense at all – economic or otherwise – ultimately a court will likely order that one spouse buy out the other or, in the alternative, that the business be sold and the profits divided just as any other marital property or assets are divided.
Solely Owned Business, or You Are Among a Number of the Business’ Owners
Where you are the sole owner of the business, or you are among a number of different individuals who own the business, a court is unable to simply order that the business be divided or that it be sold and the profits divided. Rather, in this instance, the court will determine the value of your ownership interest and may further order that your spouse receive a portion of that value, which can be accomplished in two ways: (1) you transfer that portion of your ownership interest to your spouse; or (2) you provide your spouse with something else – often simply cash – that is of equal value to your ownership interest. Option number 2 is often the favored way to go as, by transferring a portion of your ownership interest to your spouse, you not only reduce your ownership interest by that amount, but also end up in a situation where you and your spouse are co-owners of the business – which may not be the best idea right after a divorce!
Finally, where you are among a number of individuals who own the business, you will need to consult the business’ operating agreement, by-laws, or other document detailing the business’ exit plan (sometimes referred to as a buy-sell agreement). Depending upon the language of that, you may have no choice but to let your fellow owners buy out your spouse’s percentage of your interest. The bad news is that this reduces your ownership of the business. The good news, however, is that your spouse receives money for that share and you no longer have to concern yourself with finding something of equal value to give your spouse.
What if I Must Sell the Business and Divide the Proceeds?
In the event that you and your spouse are co-owners, or you are the sole owner, of a business, you have the option, as briefly mentioned above, of selling the business and dividing the proceeds.
Some Advantages of the Sale and Divide
You may end up with a nicely sized lump sum amount of money upon the sale of the business. Such cash would not only further minimize the financial ties between you and your spouse, but would also reduce the stress that comes along with those ongoing ties.
Some Disadvantages of the Sale and Divide
It is likely that there will be capital gains tax on the sale of the business, which means that there will be less in terms of net proceeds to divide.
In addition to reduced net proceeds, chances are pretty slim that a buyer will agree to pay 100% of the purchase price of the business up front. As such, the main advantage to selling the business – a nicely sized lump sum of cash at closing – is often negated.