What Happens to My Business if I Get Divorced?
There’s nothing simple about getting a divorce, and the complications are magnified when one or both of the separating spouses is a business owner. If you’re a business owner facing a divorce, you may be asking yourself, what happens to my business if I get divorced?
A spouse’s ownership interest (shares, units, partnership percentage, depending on what kind of entity the business is) is an asset. Depending on the laws of your state, the ownership interest therefore may be considered part of the marital estate, to be split between the former spouses according to agreement or court order.
Will My Business Ownership Be Split if I Get Divorced?
With a small business, “splitting” the ownership is often difficult or impossible. If you’re a business owner and getting a divorce, it is critical that you and your divorce attorney understand the legal and practical ramifications of, and limitations on, transferring ownership interest in your business. Unlike other assets, such as a house or a car, or even stock in a publicly traded corporation, ownership interest in a closely held business is often not easily liquidated in order to apportion the asset between the former spouses.
There are obvious practical reasons why a business should not be sold or receive new ownership in a divorce. Imagine Sally and Mike are getting a divorce. Sally owns a yoga studio with Jane. Sally teaches all of the classes at the studio. Mike hates yoga.
Sally’s ownership interest has some value, but it is probably useless in anyone’s hands but hers. She likely cannot transfer her ownership interest in the studio to Mike for a couple reasons:
- First, as a practical matter, the value of Sally’s ownership would plummet if she were not teaching the classes. The studio would need to hire an employee, and that would cost money. Plus, many of the studio’s customers probably patronize the studio because they like Sally’s approach: Lose Sally, and the business dries up.
- Second, as a legal matter, Sally would likely be precluded from transferring her interest to Mike (or to any third party) without Jane’s approval. Most limited liability company (LLC) and corporate documents contain buy/sell provisions which preclude transfers except in rare occasions. These provisions exist to protect Jane from being forced to go into business with someone with no interest in yoga.
Getting Divorced? First, Ask Your Attorney What Happens to Your Business
What is the solution to this conundrum? Your divorce lawyer can explain your options in your situation, but the first and most important step is to determine what you can legally and practically do with your business in your divorce. Your divorce attorney may be able to review your business documents, or you may ask your business attorney to do it. The important thing is to figure this out early on, so that the transferability (or lack thereof) of your ownership interest is factored into negotiations or court proceedings.