When one spouse has a small business, it can become a difficult issue to divide at divorce. Everything the couple acquires during the marriage is community property, so if the business was started after the marriage, then the business is community property and must be divided in divorce. Generally this means that the business is valued, and the spouse working in the business buys out the interest of the other spouse. It is the value of the business that is generally the point of contention in the divorce. Further complicating things is when the business was started before the marriage and continued during the marriage, as the amount of growth in the business during the time of the marriage must be valued and divided – with the same attendant conflicts over how to determine this value.
Often, it is the non-working spouse (by non-working, I mean not working in the business. This spouse may very well be working, but not as an owner of the business in question) who believes that the business is worth a great deal more than the working spouse thinks. Since there are dozens of ways to value a business, this can become a war of the experts in divorce court. In addition, a business can be derailed by the distraction of the divorce as well as the ultimate financial payout.
There are ways to avoid this, but generally they involve planning. First, you can create a pre-nuptial or post-nuptial agreement that provides for the division of the business in the event of divorce, and at least can specify how the business will be valued so that this is an argument you can avoid. Life insurance can be used as a protection against both the death of the working spouse or in the event of a divorce. In business, we buy insurance to protect injuries on our property, for our employees, and for our potential legal liability, but forget that we may need insurance in case we are unable to work or are in the process of divorce.
Every small business owner should take steps to protect themselves, their business and their family in the case of divorce or death. A financial advisor, divorce and estate planning attorney can help.