If you or your spouse owns a business and decide to divorce, an important issue is how that business may be divided. When parties divorce, their marital property is subject to equitable distribution. New York has specific rules governing equitable distribution, although the parties also have the flexibility to negotiate their own settlement.
Where one spouse solely owns a business or professional practice, the other spouse is typically entitled to a portion of its value when dividing a business in divorce. How that share is calculated is complicated because it depends upon the degree of contributions made by the non-titled spouse.
The spouse who has title to the business typically gets 10% of the value automatically because of his or her name recognition and/or reputation in the community that the business or professional practice is serving. Thereafter, courts will look at the non-titled spouse’s degree of contribution to the business. If your spouse worked in the business, that work constitutes “direct contributions.” Where direct contributions were made, the non-titled spouse can be entitled to 25%-45% of the appreciation in the business during the marriage. This is an important point. If the business was started before the marriage, then the court looks only at the gain in value from the date of marriage until the date of filing for divorce. If the business was started during the marriage, then the non-titled spouse has a claim for a percentage of the appreciation from the start of the business.
Direct contributions can involve any type of work – manual labor, administrative, professional, etc. – and need not be on the same level as the titled spouse. However, the more the work contributed to helping the business and its growth, the greater the share the non-titled spouse may receive.
Note that the business will be valued at the time the divorce action was filed because a non-titled spouse should not benefit from the appreciation of an asset when the marriage is deemed to have ended by virtue of the filing of the divorce action. Valuation should be done by a valuation expert.
You and your spouse can negotiate other terms when dividing a business in divorce, including settling on a lesser or greater share of the business in exchange for some other benefit. A key point is to consult experienced legal and financial advisors to ensure a fair resolution of your matter.
If you are considering divorce, contact us to discuss how we can help you obtain the best result in your case.