For small business owners, divorce may bring even more stress and worry because the spouse who owns the business may be concerned about what will happen to it during a divorce. Depending on the type of business and where the money came from to purchase it, the business may be considered an asset of the marriage; thus, a court may divide the value of that business between spouses when they divorce. However, each state has its own laws addressing business assets during a divorce.
Marital Vs. Separate Property
Generally, property acquired during a marriage is considered marital property divisible by a court during a divorce. Some property, such as that acquired by gift or inheritance, is not typically considered marital property even if it was acquired during a marriage. Property not considered marital property is considered the separate property of the spouse who acquired it, so a business may be considered either a separate or marital asset depending on the way it was acquired. For example, if one spouse inherited the business from a relative, the business may be considered separate property and the divorce court will not consider it when creating the divorce settlement. Alternatively, if the business was purchased with marital assets, it may be considered marital property and the court may divide it in the divorce.
Protecting a Business
Even if the business is not completely a marital asset, the profit one spouse makes from selling it could be considered marital property. As a result, a spouse may wish to protect his business in the event of divorce. Depending on state law, both prenuptial and postnuptial agreements can address a spouse’s business. A prenuptial agreement is a contract between spouses, signed before they marry, that addresses how the spouses wish to divide their assets if they later divorce. A postnuptial agreement is a contract made between spouses after marriage, but before divorce, and can address how the spouses want their assets divided, including business assets, in the event of divorce.
When spouses mix, or commingle, marital and separate property, the separate property may lose its special characterization. As a result, courts may consider the commingled separate and marital property as wholly marital property and divide it all upon divorce. For example, if a spouse deposits separate business funds, earned prior to the marriage, into a joint bank account that also holds marital funds, a court may find the separate funds have become so commingled they have lost their separate character, making them divisible between the spouses upon divorce.
Child Support and Alimony
Depending on state law, divorce courts might consider income from the business or its sale as income for purposes of child support or alimony calculations. Child support is often based on a mathematical formula, but courts have authority to deviate from a default support amount if there are unique circumstances. Alimony judgments are usually based on a series of factors rather than an exact formula, so judges may consider the value of a business or its sale when determining whether to award alimony and in what amount — even if the business is one spouse’s separate property.