In divorce, marital property is equitably distributed, which means it is divided fairly under the circumstances, and not necessarily equally. Where the property to be distributed includes a business that is owned by only one of the spouses, New York law provides a formula for determining what is a fair split. However, there is an added wrinkle in the calculation when the spouse owning the business shares ownership with one or more partners. In that situation, it is necessary to first value the spouse’s partnership interest before determining the non-owner spouse’s share.
Under New York law, the spouse who has title to a business typically gets 10% of the value automatically by virtue of his or her reputation as owner of the business. The non-titled spouse also gets a share but the amount varies depending on how much he or she contributed to the business. Those contributions could have been made directly by working in the business or indirectly by working in the home or making contributions through other work that enabled the business owner to have more time to focus on the business. Where the non-titled spouse made indirect contributions, his or her share is likely to be between 5%-25% of the business owning spouse’s interest in the business. If the contributions were direct, 25% to 45% of the business owning spouse’s interest may be awarded to the non-titled spouse.
If the business is a partnership between the titled spouse and non-parties, determining the non-titled spouse’s share requires several steps. First, the whole business must be valued, including the amount of appreciation in value for the relevant period. If the business began before the marriage, the non-titled spouse’s claim is limited to the business’s appreciation from the date of the marriage to the date the divorce action was filed. Thus, the value of the appreciation to the business must be determined instead of the value of the overall business. If, however, the business was started during the marriage, the appreciation is from the start of the business to the date of filing for divorce.
Second, after the business is valued, the titled spouse’s partnership interest must be determined as the non-titled spouse is only entitled to a portion of his or her spouse’s interest and cannot share in the value of the entire business. The amount the non-titled spouse gets is calculated as previously discussed based on his or her contributions to the business.
Third, a valuation expert must be brought in to value the business. Financial negotiations can often become contentious so it is essential to get good legal and financial advice to ensure a fair settlement.
If you are considering divorce, contact us to discuss how we can help protect your interests.