When one spouse owns a business, there are specific rules that govern how it is divided in divorce. Under New York law, a spouse who doesn’t have title to the business may still be entitled to a share of the appreciation of the business depending on various factors. These rules can be complicated as they require the court to consider the non-titled spouse’s contributions to the business and, separately, whether there was any commingling of personal and business assets by the titled spouse.
How Is a Business Divided in Divorce?
A business is considered an active asset meaning that it is an asset that a party actively works on a regular basis during the marriage which leads to the asset’s growth or appreciation. In a divorce, active assets are divided as follows:
- The spouse who has title to an active asset typically gets 10% of the value automatically by virtue of his or her reputation and ownership thereto.
- The non-titled spouse has no claim to that part of the business that was started before the marriage although he or she does have a claim on any appreciation of it from the date of the marriage to the date of the divorce action.
- If the business was started during the marriage, the non-titled spouse has a claim on a percentage of the value of it from the start of the business to the date of filing of the divorce.
- The non-titled spouse’s percentage is determined by evaluating his or her direct and indirect contributions to the business.
What Are Direct and Indirect Contributions to the Business?
Direct contributions to a business by a non-titled spouse include working in the business, whether that involves providing actual labor, or administrative or professional assistance, or doing something outside of the business that contributes to the business. Where such contributions are made, the non-titled spouse can be entitled to 25%-45% of the value or appreciation of the business as noted above. The greater the contributions toward the business and its growth, the greater the percentage of the value or appreciation, as the case may be, goes to the non-titled spouse.
Indirect contributions include activities by the non-titled spouse that enable the business owner to focus more on the business than he or she otherwise would be able to including maintaining the house, cooking, cleaning, taking care of children, shopping, etc. The non-titled spouse’s work in this regard is deemed to free up the titled spouse to devote that time to the business. The non-titled spouse who contributes indirectly to the business will typically get 5%-25%.
Importantly, the non-titled spouse only gets a percentage of the business’s value or appreciation during the marriage as discussed in the prior section.
How Are Individual Assets of the Business Treated in Divorce?
A business’s valuation includes all of its assets. Generally, this would include its bank accounts, real estate, equipment and inventory which is the property of the business entity. However, if such assets are used by both spouses, there can be questions about whether they should still be treated as owned by the business. For example, a titled spouse’s commingling of business and personal bank accounts, such as by paying personal expenses from the business accounts, may compromise the separateness of the business account and render it a personal asset because of how it was treated.
When a business must be valued and divided in divorce, it is important to consult an experienced attorney who can represent your best interests and negotiate fair terms. Contact us for help with your matter.
