Spouses can only protect certain assets as their separate resources when they divorce by signing a prenuptial agreement that designates the business as separate property and protected it from division. Otherwise, a business interest is likely a marital asset subject to division. However, that does not mean the business must be sold to satisfy the share of the non-owning spouse.
Owning businesses together is a common marital investment. Typically though, after the dissolution, one spouse maintains the formerly jointly-run or jointly-owned business – which requires some distribution to the selling spouse. The potential distribution of value from the business applies even if the business was founded and operated prior to the marriage by one spouse or when that spouse has a history of running a certain type of organization, including with other family members.
Although they might assume the company is their separate property, it may be at least partially marital property. They then have to worry about preserving the organization during the divorce. For business owners, preserving a company’s value and continued operation after the divorce may be the top priority during divorce proceedings.
Is a business at risk of division, or can the spouse who started a company or professional practice guard its value for themselves during a divorce?
You can secure settlements that protect your business
One spouse may seek to claim the business as their “separate property.” Indiana Courts though, short of a pre-marital agreement, will not recognize any asset, even a pre-marital business, as “separate.” Although the business may not be separate, that does not necessitate a sale of the business to effectuate a proper division of this type of complicated marital asset. The value of the business, if any, is critical to determine. In other words, some businesses may generate significant revenue but have little to no value that is divisible – this is the case where a business is primarily based on personal goodwill (i.e the person operating the business is the value, not the business itself). Other businesses that have market value or enterprise value, which generate revenue regardless of the personal goodwill. Other arguments pertinent to preserving businesses include pre-marital value, inherited or gifted interests, and contribution by one spouse outweighing the other non-contributory spouse.
Keep in mind that businesses require constant reinvestment. It is typical for spouses to use marital income (any income earned during the marriage) and/or marital assets to maintain, improve and grow a business. In some cases, the non-owner spouse might even perform work for the company, possibly on an unpaid basis.
Commingling marital income and/or assets can further complicate property division matters by allowing one spouse to claim that they have at least a substantial interest in the company. Thankfully, even in cases involving commingling, it is possible to retain sole ownership of the business.
People may need to offset the company’s value with other assets, make a property equalization payment or to take on extra debt to offset its value in some cases. However, so long as they can reach an amicable settlement with their spouse, they can potentially avoid putting businesses at risk of shutting down.