Divorce Considerations for Small Business Owners

Property division can be a bone of contention in any divorce, but for small business owners, the issue is especially fraught. Not only may the business make up a significant part of the marital assets, it may also be the primary source of income for one or both spouses.

If you are a Minnesota small business owner who is contemplating divorce, or your estranged spouse owns a small business, there are a number of things you should take into consideration as you proceed.

Will Your Spouse Get Half of Your Business?

Minnesota is a so called "equitable distribution" state when it comes to dividing marital property. This means that courts attempt to divide property fairly, which usually means more or less equally. However, that doesn't translate to each spouse getting half of everything. Instead, what may happen is that the value of all marital property will be assessed, with each spouse being awarded approximately half of the value. In practice, this might mean an arrangement like one spouse getting the marital home and the other getting the business.

How Will the Business Be Valued?

This is often one of the most hotly debated issues when a small business is part of the marital property to be divided. One of three methods is typically used to value a small business:

• Income Method: this approach examines the business's current earnings, and possibly anticipated future earnings.
• Market Method: this approach compares the business at issue to similar businesses in similar circumstances which have recently been sold to see what the market value of the business would be. However, if the business is unique, or it is difficult to find comparable business sales, this method may yield an inaccurate figure.
• Asset Method: this approach arrives at the value of a business by calculating the value of its assets less its liabilities. This approach may not work well with businesses that have intangible assets, such as goodwill, that are difficult to value.

Even if you think you know what your business is worth, it is often a good investment to hire a business valuation expert. Today, when parties are typically focused on resolving their case, a neutral expert is often hired to determine the value of a business. By contrast, cases that are headed to trial typically involve two experts. Depending on the nature of the business and the valuation method used, the figures put forth by you and your spouse could vary wildly, perhaps by hundreds of thousands of dollars. A judge can only make a decision about the business's value based on the information before him or her. You want your position to be evidence-based and trustworthy, and using a good expert is the best way to achieve that.

Tax Consequences of Divorcing with a Small Business

Arriving at an accurate valuation of the business is not your only concern. You also need to make sure that the division of property in your divorce, including your business, does not create unintended tax consequences. As a general rule, transfers of property incident to divorce are not subject to gift or transfer taxes. That said, there still may be tax issues depending on how your property settlement is structured.

For instance, if you, as a business owner, want to retain the business, you may need to "buy out" your spouse's share. This may be structured as a series of payments over the course of years. These payments could create negative tax consequences for you or your ex-spouse if not properly structured.

The take-away for business owners is to understand that their business will complicate property division in their divorce, and that they must retain an attorney who will work together with business appraisers and accountants who can help them accurately value their business, and minimize their tax burden.

If you are concerned about the future of your business in a divorce, it's best to talk to a qualified Minnesota divorce attorney. Contact Bloch and Whitehouse, P.A. at (952) 224-9977 to schedule a free initial consultation.