After 19 years of marriage, Eric and Ariel reached the unfortunate decision to get a divorce. Ariel has a had a business of gathering and selling various collectibles since before the two were married. But, now that she's getting a divorce, she's wondering what will happen to her business. Will it be divided between her and Eric or does it belong solely to her since she had it before the marriage? Well, it depends.
In the event of a divorce, a business will be looked at as an asset. Whether it will be divided, however, depends on state laws, whether the business is characterized as marital property, and whether a prenuptial agreement is in place, among other factors. Read on to learn more about divorce and business ownership.
Defining Marital Property
The primary factor in determining whether a business is subject to property division is its classification as either marital or separate property. Marital property refers to the joint property of a married couple, which is more complicated than it seems.
First, state laws affect how marital property is defined, usually either as community property or as property subject to equitable distribution. Second, how the property is treated and even what happens to it over the course of a marriage can affect how the property is ultimately defined.
Divorce and Business Ownership: Community Property vs. Equitable Distribution
It's important to first determine whether a divorcing couple lives in a community property state or an equitable distribution state. In community property states, almost all property acquired during a marriage is joint property of the spouses; property that each spouse had before the marriage is separate property. Of course, the law is never simple, so there are exceptions. Any gifts or inheritances given to one spouse during a marriage is considered separate property, although commingling that property with community property can change its characterization.
In equitable distribution states, property division is less straightforward because a judge decides how it's divided. Of course, there are certain guidelines set by state laws on how the property should be divided. In addition, the idea behind equitable distribution is that the property is divided "fairly" but not necessarily equally.
Divorce and Business Ownership: When Is a Business Marital Property?
If the spouses are co-owners of the business, it will be considered marital property. But, that's not the only way a business will be classified as marital property. If a business was started after the couple got married, it's likely that it'll be considered marital property.
Businesses started by one spouse before marriage, may not be considered marital property, but this isn't always the case. For example, it can still constitute marital property if the non-owner spouse contributed to the business during the marriage. It's important to note that "contributed" can include not only direct contributions of time to the business, but also taking care of the home while the business owner ran the company.
Protecting Business Ownership Through a Prenuptial Agreement
The best way to ensure that a business stays out of property division in a divorce is to have a prenuptial agreement. Of course, sometimes a spouse may start a business after getting married in which case including it in a prenuptial agreement wouldn't be possible. However, it would be possible to get a postnuptial agreement to clearly define business ownership, which is just like a prenuptial agreement except that it occurs after the couple is already married.
Have Questions About Divorce and Business Ownership? Talk to an Attorney
Divorces are complicated, not only because of the various issues involved, but also because of the emotional factors. If you have questions about how divorce affects business ownership or need help with other aspects of the divorce process, it's best to consult with a local divorce attorney in your area.