Divorce and Business Ownership: Understanding the Division of Assets for Pre-Marriage Businesses

Many business owners believe that if they owned their business before marriage, it is entirely their separate property and cannot be divided during divorce. However, this assumption is often more complex than it appears. The value of a business established before marriage may still be subject to division, depending on how its value has changed over time, as well as the income it has generated during the marriage.

Separate vs. Marital Property: What You Need to Know

In a divorce, determining what is separate property and what is marital property is crucial. Separate property generally refers to assets that were owned before the marriage, such as a business that existed prior to the union. However, certain elements of the business—such as income or appreciation—could be considered marital property if they were earned or accrued during the marriage.

For example, in some jurisdictions, the appreciation of a business is treated as separate property, while the income generated by the business is treated as marital property. This means that while the business may have been owned before the marriage, any increase in its value or earnings after the marriage may be divided between spouses.

How Business Valuation Plays a Role in Divorce

Valuing a business in a divorce requires careful analysis. A business valuation expert will typically look at the business's value at the time of marriage and compare it with its value at the time of divorce. If the business has appreciated in value due to the efforts or investments made during the marriage, the increase in value may be considered marital property.

Additionally, business income and distributions made to the owner during the marriage may also be subject to division. For example, if the business owner received payments or distributions from the business during the marriage, those amounts could be considered marital income.

Factors to Consider in Valuing a Pre-Marriage Business

When valuing a business that existed before the marriage, a business valuation expert will assess multiple factors. These include the structure of the company (LLC, corporation, or partnership), any reinvestment of earnings into the business, and the reasonable compensation paid to the owner. The valuation expert will also determine the degree to which the business relies on the owner’s active participation.

While the business owner may have built the business before marriage, the growth or reinvestment during the marriage may influence the overall value and division of assets. The valuation expert will help determine what portion of the business should be considered separate and what portion is marital property.

Working with a Divorce Valuation Expert

Navigating the complexities of business ownership during a divorce requires professional guidance. A qualified business valuation expert can help determine the fair value of a business and how it should be divided between spouses. They can also provide expert testimony if necessary, ensuring that the valuation process is conducted accurately and fairly.

If you are a business owner considering divorce, contact The Divorce Allies to work with experienced professionals who understand the nuances of business valuation in divorce. We can help ensure that your assets are protected, and your interests are fairly represented throughout the divorce process.