Some people start businesses after getting married. They invest marital income in the company and may even rely on the unpaid work of their spouse to get the company off the ground. If they later divorce, their business is likely part of the marital estate. They may have to divide it in accordance with property division statutes.
Other times, business owners may believe that the company could be separate property. Perhaps they already owned the business before they got married, or maybe they inherited the business from a family member. Assets owned prior to marriage are usually separate property. The same is generally true of assets received as gifts or inheritances. With that said, businesses, given their complex nature, can be difficult to preserve as separate property without a written agreement and careful financial separation.
Commingling is a common issue
Separate property can end up included in the marital estate whenever commingling occurs. Commingling could involve giving a spouse access to separate resources or legally adding their name to ownership documents.
Commingling might also involve using marital resources for the maintenance or improvement of separate property. Even the sweat equity or unpaid work provided by a spouse at a business might potentially give them a partial interest in the organization.
Small companies and professional practices are vulnerable during divorce if the owner does not have an airtight prenuptial agreement or has very carefully ensured that they do not use marital resources for business purposes. In the vast majority of cases, any investment of resources in the business after beginning the marriage could lead to claims of commingling if the spouses eventually divorce.
Thankfully, business owners can potentially protect their business investments from major losses. A thorough financial review can help a business owner establish that a significant portion of the company’s value is their separate property. Negotiating a settlement directly with a spouse can help eliminate the risk of dividing the company’s ownership or otherwise diminishing its value during the divorce process.
Individuals with complex assets may need help as they prepare for an upcoming divorce. Understanding that a business is often, at least partially, marital property can help business owners better prepare themselves for the process ahead.
