Generally speaking, there are three methods of dealing with a business
in a divorce. Regardless of the type of business: professional practice,
retail business, restaurant, etc. when it’s time to divide the marital
assets it’s often one of the most difficult assets to “divide” evenly.
3 Methods of
Dealing with a Business in a Divorce:
- Maintain Co-Ownership
- Sell the Business and Divide the Profit
- One Spouse Buys Out the Other Spouse’s Interest
Many feel the difficulties inherent in co-ownership of a business post-divorce
would be detrimental to the company’s health. In most cases, selling
the business is usually blocked by one (or both) of the parties wanting
to retain ownership. That leaves the third option as the most beneficial
for the majority of cases.
In a buyout, one spouse retains ownership of the business by buying out
the other spouse’s interest. If there are sufficient assets to complete
the transaction, the buyout is typically the best solution. If the spouse
buying out the other has enough liquid assets or cash to complete the
transaction, it’s simple. But it can be accomplished even if there
isn’t enough funding available for complete, immediate payment.
In some cases, the value of the business can be offset using other marital
assets: home equity, retirement accounts/assets, securities outside of
qualified plans, etc.
In other cases, the lack of funds to buyout a spouse’s interest in
a business can be solved with a property settlement note. The use of a
property settlement note enables the spouse buying out interests in the
company to do so without coming up with a lump-sum payment. Instead the
amount of the “lump-sum” is divided into smaller payments
to be paid out over a period of time (usually with interest). The property
settlement note may not be taxable because of IRS rules stating that transfer
of certain property in marriage is not taxable. There can be an issue
if the spouse who buys out the other’s interest in the company runs
it into the ground. If the spouse who completed the buyout transaction
declares bankruptcy, the property settlement note may not survive.
If you have questions about issues related to the division of the business
as a result of
your divorce, contact the Arizona divorce attorneys at
Arizona Family Law Attorneys.