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Divorce: 3 Methods of Dealing with the Division of the Family Business

Divorce: 3 Methods of Dealing with the Division of the Family Business

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:

  1. Maintain Co-Ownership
  2. Sell the Business and Divide the Profit
  3. 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.

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