When one spouse owns a business in his or her name only, the other spouse is still entitled to a share in the value of the business in divorce. The rules governing how that share is calculated is set forth in New York statutes. The law considers various factors including when the business was started and how much a non-titled spouse contributed to the business. Importantly, such contributions include “non-economic” or indirect contributions – meaning activities that help the business without providing money or direct services.
In divorce, marital property is equitably distributed, which means it is divided fairly under the circumstances, not necessarily equally. With an active asset like a business, a party is actively working the asset on a regular basis which leads to the asset’s growth or appreciation. As a result, that party is entitled to a greater share of the business than for a passive asset like a stock where the increase or decrease in value is due to external market conditions. However, the non-titled spouse is still entitled to a share.
As noted above, the non-titled spouse’s contributions count even if they were not made directly to the business, such as by having a job in the family business. Non-economic or indirect contributions can include activities like working in the home to maintain the house, cooking, cleaning, taking care of children, shopping, running errands, paying bills, etc. The law recognizes that by handling these tasks, the other spouse has more free time to devote to the business.
Where a non-titled spouse has made indirect contributions to the business, generally, his or her claim is likely to be valued at around 5%-25%. However, the spouse can only receive that percentage on the business’s appreciation during the marriage. 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.
Importantly, the parties must bring in a valuation expert to determine the amount of appreciation during the marriage. The cost of the expert may be split between the parties depending on whether the non-titled spouse has independent resources to contribute to the expert’s fees. In any event, the cost may be reallocated at the end of the divorce case once all assets have been valued and divided.
As noted above, the parties may negotiate their own terms. However, it is important to get good legal and financial advice to ensure a fair settlement.
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