The family business is often a point of serious contention in divorce. One party ran the business while the other ran the household or had their own job, and yet the uninvolved spouse states they are entitled to an ownership stake. The other spouse feels they should be able to keep the business that they built. Read on to learn about how New Jersey law treats business ownership interests upon divorce, and call a knowledgeable Englewood property distribution attorney for help with a New Jersey family law matter.
Business Interests Are Property, Subject to Division
In New Jersey, marital property is subject to equitable division upon divorce. Marital property includes anything that is earned or acquired during the pendency of the marriage, with limited exceptions. The definition of “property” is extremely broad, covering everything from cash to securities, real property, personal property, retirement accounts, as well as business ownership interests. So long as the property was acquired during the pendency of the marriage, it is marital property and will be equitably divided upon the parties’ divorce. If the business was established during the pendency of the marriage, even though only one spouse was involved with the business, the business ownership interest is a marital asset.
Even Pre-Existing Businesses May Be Marital Property
Property owned before marriage is known as “separate property” and is not subject to division upon divorce. However, even separate property can become marital property in whole or in part when it is commingled with marital assets.
If you used marital assets to expand or grow your business during the pendency of your marriage, then that growth may be treated as a marital asset. Your spouse would be entitled to an equitable share of the portion of your business that is deemed to be a marital asset. The portion of your business to which your spouse may be entitled may be even greater depending upon their personal contribution to the business, including their own labor and involvement as well as their contribution by way of taking over home and family responsibilities.
Valuing the Business
For your business interests to be equitably distributed, the parties and the court will need to obtain a proper valuation of the business. There are a number of methods for valuing a business depending upon the nature of the business and the type of data available. Relevant factors may include the business’s physical property, intellectual property, debt, annual income, and inventory, as well as factors like the purchase price of similar businesses in similar locales. The parties will likely retain financial experts to conduct valuations in order to reach a fair number.
Options for Distribution
Once it has been established that some or all of your business is marital property, and the valuation has been obtained, the question remains: How should the business interests be divided? Unlike a bank account, it’s difficult to cut a business down the center. There are typically three general approaches to distributing business ownership interests in a divorce. The optimal choice depends upon the nature and circumstances of the business as well as the family involved:
- Buyout. Buyouts are the most common resolution for business ownership division in divorce. Typically, one party is the primary owner of the business and their spouse has an ownership interest by way of contribution of marital assets. The non-owning spouse is entitled to a share of the value of the business, but need not actually retain an ownership stake. The owner spouse would simply buy the non-owner’s shares for fair market value, either in cash or through an exchange of other marital assets of equivalent value.
- Liquidation. If the parties cannot agree on a buyout and the business does not need to continue to exist in its current form, the parties can agree to sell off the business and split the proceeds according to the appropriate, equitable division. If the primary owner does not mind starting a new business or moving on, this can be an attractive option, but if the primary owner wishes to keep the business running in its current form or liquidation is not possible given other owners, then this option might not be on the table.
- Continued joint ownership. The parties may continue to own their respective portion of the business following the divorce. If it’s a small family business and the parties can continue to operate the business together amicably, this may be an option. Many businesses, however, anticipate the possibility of divorce and strictly forbid spouses from taking shares or ownership interest following divorce. The bylaws of those companies will likely provide for some sort of buyout rather than a former spouse retaining an ownership stake.
Seasoned Advice and Representation for New Jersey Property Distribution and Complex Divorce Matters
If you’re considering divorce in New Jersey or dealing with property division, child support, child custody, or other family law issues, contact the Englewood family law attorneys Herbert & Weiss at (201) 500-2151.