Are There Specific Shares or Ownership Stakes in the Business, and How Will These Be Divided Between the Parties in the Event of Separation?

 

Divorce and separation can bring about a host of complex issues, especially when a business is involved. For couples who jointly own a business, one of the most significant questions is how the ownership stakes will be divided. If you’re part of a partnership or share ownership in a company with your spouse or partner, the question of how your shares or ownership stakes will be divided during a divorce can have a significant impact on both your personal and professional life.

In this blog, we’ll walk through the various scenarios regarding specific shares or ownership stakes in a business, and how they might be divided when a couple decides to separate or divorce. We’ll explore key considerations, what factors influence the division, and what you need to know to protect your interests.

Understanding Ownership Stakes in a Business

Before diving into the specifics of how ownership stakes are divided during separation or divorce, let’s first establish what ownership stakes really mean in the context of a business.

Ownership stakes refer to the portion of a company that each person legally owns. This could be in the form of shares in a corporation, partnership interest in a business partnership, or even a sole proprietorship where the ownership is held by just one person. The percentage of ownership determines how much of the business someone owns and, consequently, how much of the business’s profits, losses, and value they are entitled to.

• Shares in a Corporation: If a couple owns a corporation and holds shares, their ownership stakes are typically defined by the number of shares they own relative to the total number of shares in circulation. For example, if one spouse owns 60% of the company and the other owns 40%, then they have clear ownership stakes that can be divided based on these percentages.

• Partnership Interests: In a partnership, ownership stakes are often outlined in the partnership agreement. The percentage of the business each person owns depends on what was agreed upon when the partnership was created. If no specific percentages were set, then it could default to a 50/50 split, depending on the laws governing partnerships in the jurisdiction.

• Sole Proprietorship: If the business is a sole proprietorship, one spouse owns the entire business, and the other spouse has no formal ownership stake unless it was agreed upon or formalized through a different arrangement.

Understanding the legal structure of the business (whether it’s a corporation, LLC, partnership, or sole proprietorship) is essential to understanding how ownership will be defined during divorce or separation.

How Will Shares or Ownership Stakes Be Divided During Divorce?

Once the legal structure of the business is determined, the next step is to figure out how the ownership stakes or shares will be divided during the divorce. Several factors come into play when dividing business ownership, and the specifics can vary based on individual circumstances, jurisdiction, and whether there is any pre-existing agreement (like a prenuptial or postnuptial agreement). Below are the main ways ownership stakes may be divided during separation:

1. Equitable Distribution vs. Community Property

When dividing assets, the court will consider whether the jurisdiction follows an equitable distribution or community property system.

• Equitable Distribution: In most states or countries, the division of assets follows an equitable distribution model. This means that the court will divide the property (including business ownership) in a way that is fair but not necessarily equal. For example, if one spouse has a larger role in running the business or has contributed more financially, the court may award them a larger share of the business.

• Community Property: In community property states or countries, all property acquired during the marriage is considered jointly owned by both spouses. This means that the business, even if it was started by one spouse, could be considered a marital asset and subject to a 50/50 division. However, the court may consider factors such as the length of the marriage, contributions to the business, and whether either spouse was involved in running or managing the business.

2. Valuation of the Business

One of the most crucial aspects of dividing a business during a divorce is determining its value. Without a clear and accurate valuation, it can be difficult to decide how to divide the business. This valuation can include both tangible assets (like equipment and property) and intangible assets (such as intellectual property, customer lists, or brand value).

• Independent Valuation: Typically, an independent business appraiser will be hired to determine the fair market value of the business. The valuation will take into account factors such as revenue, profit, market conditions, assets, liabilities, and other relevant business information.

• Goodwill: Another important consideration is the goodwill of the business, which is essentially the reputation, customer base, and potential for future growth. Goodwill is often considered a marital asset and can significantly affect how the business is valued and divided.

3. Buyout of the Non-Owner Spouse

In cases where the business is jointly owned, but one spouse wants to retain full control of the business, a buyout can be a common solution. A buyout occurs when one spouse purchases the other spouse’s share of the business.

• Determining the Buyout Price: The price for the buyout is typically based on the valuation of the business, which, as mentioned, can be determined by an independent appraiser. Once the value is established, one spouse will offer to buy the other’s share, usually with payment arrangements that could involve lump sum payments, installment payments, or the transfer of other assets.

• Financing the Buyout: Depending on the size of the business and the amount of money involved, financing the buyout can be a challenge. In some cases, one spouse may need to take out a loan or use other assets to finance the buyout.

4. Selling the Business

If both spouses are unable or unwilling to continue running the business together, the court may order that the business be sold and the proceeds divided equally or in accordance with the terms of the divorce settlement. This is more common in cases where the business does not have a clear path for one spouse to buy out the other.

• Sale Process: The sale could be handled privately or through a formal process, depending on the business type and the terms agreed upon. After the sale, the proceeds are typically divided according to the court's decision or the divorce settlement agreement.

5. Maintaining Joint Ownership

In some cases, the court may decide that the couple will continue to jointly own and operate the business after the divorce. This is more likely if the couple has built a strong business together and neither spouse is interested in walking away. However, joint ownership can be challenging post-divorce and may require specific terms in a divorce settlement to ensure that both parties have a fair say in the operation and management of the business.

• Management Agreement: If joint ownership is the preferred option, the couple may enter into a management agreement to define each person’s role and responsibilities in running the business moving forward. This can include decision-making processes, financial arrangements, and dispute resolution mechanisms to ensure that both parties can co-exist in the business without further conflicts.

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Key Considerations When Dividing Ownership Stakes

When determining how to divide business ownership in a divorce, several factors should be considered:

• Contribution to the Business: The court will take into account who contributed more time, effort, and finances to the business. Even if one spouse is the legal owner, if the other spouse has contributed significantly to the operation or growth of the business, they may be entitled to a portion of the business.

• Nature of the Business: The type of business may also impact how ownership is divided. A family-owned business might be handled differently from a small startup or a corporation that has significant assets and employees.

• Duration of the Marriage: The length of the marriage will play a role in determining whether the business is considered marital property or separate property. In long marriages, businesses that were started by one spouse may still be treated as marital property if they were developed or grew during the marriage.

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Conclusion: Dividing Business Ownership in a Divorce

The division of ownership stakes in a business during divorce can be a complex and nuanced process, influenced by many factors such as the type of business, the length of the marriage, the contributions of both spouses, and the terms outlined in any prenuptial or postnuptial agreements. Whether through a buyout, sale, or continued joint ownership, the goal should always be to ensure that both parties are treated fairly and that the business’s future is protected.

If you’re facing the prospect of divorce and are concerned about how your business will be divided, consulting with an attorney and financial expert can help guide you through the process. By understanding the legal principles and preparing in advance, you can navigate the challenges of business ownership during separation with confidence and clarity.