Impact of Divorce on a Small or Family-Owned Business

Impact Of Divorce On A Small or Family-Owned Business

Every year there are hundreds of thousands of divorces. The end of your marriage and a relationship you once thought would last forever can be hard to conceive. And, if any of your income comes from a small business or a family business, the divorce process could become more complex.

The court has to decide how much of the family business should go to each party or if there should be any division. To do that, they will look at what has happened with the small business over the years as well as the existence of a prenuptial agreement. Several factors will go into the judge’s final decision.

If you’re considering getting a divorce and you’re looking for some guidance on your small business, keep reading and learn everything you need to know about the impact of divorce on a small or family business.

What Happens First?

When you decide to divorce, you will begin meeting with lawyers and having a judge help you determine who gets what, including with a small business or a family business. Minnesota is an equitable distribution state, meaning your property will not be immediately divided and split down the middle. The court will look at all the involved parties and try to distribute everything fairly.

Marital vs. Non-Marital Property

Marital vs. Non-Marital Property

One of the things the court will consider is what belongings you have are marital property and what is non-marital property. Unless stated otherwise in a prenuptial agreement, anything acquired during the marriage is marital property. If it was obtained before the marriage or was a gift to one member of the couple, it is non-marital.

Your small business will fall squarely into this area. If your business began before you married, it is non-marital property. However, if you started it together or if you started it while you were married, it belongs to both of you.

Your Small or Family-Owned Business Is Marital Property

If your small business is marital property, you may fear the court will liquidate it and give you each half the value. However, most of the time, the court will not decide in that way with a family business.

Normally, the judge will use the value of the small business when splitting the property. What happens to the family business after that will depend on you and the decisions you come to with your former spouse.

Your Small or Family-Owned Business Is Non-Marital Property

If you built your business before you got married, you probably think you are in the clear. But it does not quite work that way. Divorce law is much more nuanced than that. There are a few factors that could make some or all of your business convert to being marital property.

  • If there was an increase in your business’ income during your marriage.
  • If you and your spouse were mostly financially dependent on the business, or if there was a financial gain or windfall that happened because of it.
  • If your spouse worked in the business, helped run it, or in some way contributed substantially to it.

How Can I Prevent a Divorce From Ending My Small or Family-Owned Business?

The best way to protect your small business from becoming a casualty at the end of your marriage is to have some conversations with your spouse early on. If you own a family business when you get married, talk with your partner about what will happen to it if your marriage does not work out.

A prenuptial agreement could avoid a lot of arguing and worrying later on. Many people feel that it puts a curse on their wedding, but it could save your livelihood in the long run.

The money for your small business and your personal money should be kept away from each other. Do not use your personal property to invest in the business. This will make things a lot less confusing later on.

What If We Did Not Do Those Things?

There is a good chance that you are getting a divorce and realizing that you did not prepare for this outcome with a prenuptial agreement. One of your options is to sell the business. That should be your final choice since it is the one thing you probably do not want to do.

Another alternative could be to take on a partner or get some investors for your family business. That way, you could be selling a portion of your stake in the business to pay the amount the judge orders to your ex-spouse. You could set up a contract that gives you a chance to buy your stake back at a future date.

Another thing that may be possible is to pay your former partner over time. If things are not too volatile between you, they may be agreeable to an arrangement where they can get their money in smaller increments in an attempt for you to keep your business afloat.

impact of divorce on a small or family-owned business

Final Thoughts

One thing that is for sure is that you cannot navigate situations like this alone. There are many twists and turns when it comes to divorce law and having a competent professional to guide you is essential if you want to have a chance., especially if your small business may be impacted.
Our skilled legal team at CJB Law has been assisting people during their divorce for a long time. We know what your options are. You don’t have to be alone. If you own a small business or a family business and you’re considering getting a divorce, contact us today.