For many couples, the family business is more than just an income source. It often represents years of hard work, sacrifice and shared effort.
When divorce becomes a reality, deciding what to do with the business becomes a serious concern. It’s a complex part of the divorce process that affects both parties financially and emotionally.
Marital versus separate property
North Carolina is considered an “equitable distribution” state, which means marital property is divided fairly, though not necessarily 50/50. Before the court can begin any property division, it must determine whether the business is marital property, separate property or partly both.
If the business was started during the marriage, it’s generally considered to be marital property. If one spouse owned the business before they married, it will likely be deemed a separate asset.
However, even if the business is considered separate property, any increase in value during the marriage may be marital if that growth resulted from the other spouse’s efforts or the use of marital funds.
Courts also recognize indirect contributions. Even if a spouse wasn’t part of the daily operations, they may still have contributed by supporting the household or raising children.
There must also be a business valuation. Courts typically rely on financial records, tax returns and testimony from a business appraiser. The valuation may include tangible assets, liabilities and goodwill. The courts distinguish between personal goodwill, which is tied to a person’s reputation, and enterprise goodwill, which belongs to the business. While enterprise goodwill can be subject to division, personal goodwill can not.
In some cases, the spouses may continue co-ownership after the divorce, or sell the business and split the proceeds. Most often, one spouse retains ownership of the business while compensating the other spouse for their share, which may take the form of a lump-sum payment or by giving up more of the other marital assets, such as retirement accounts or real estate.
Due to the complexities of dividing a business during a divorce, working with a legal professional is critical. A careful, strategic approach can help ensure your rights are protected and minimize any unnecessary disruption to the business you’ve worked hard to build.