The divorce process inherently encompasses many issues, including child support, child custody, parenting time, and property division. Many of our past blog posts have discussed these topics generally, and in great detail. One particular thing that can muddy the waters of a divorce matter is when the parties together, or even just one, owns and runs a small business.
It may seem obvious if Husband and Wife are co-owners of a family business, and both contribute to the growth and sustainability of that business, that the business is part and parcel of a divorce action. The parties, or a judge, will have to decide who will own the business after the divorce, if there is a value to the business that the spouse retaining it will have to pay the other spouse to “buy out” their property interest in same, etc. However, it may seem less obvious that a business owned, and run exclusively by one spouse, wherein the other spouse has not active role in same, is still part of a divorce action. This is because, in Indiana, it does not matter, for property division purposes, who is the registered owner of a business, and what percentage of ownership between the spouses there is, because so long as one spouse has an ownership interest, that interest belongs to both spouses equally under Indiana’s marital pot theory.
The “marital pot” theory means that all assets and liabilities, owned by either Husband or Wife BEFORE and during the marriage, no matter how the property is titled, is jointly owned by the husband and wife equally and collectively.1 There is a legal presumption that property will be divided equally (50/50) upon divorce, with some exceptions to deviate from this presumption.2 Obviously, a business, even if run by both spouses, cannot continue to be run by both spouses after the divorce, in all practicality. Therefore, it must be decided which spouse will retain the business, and keep the property ownership rights in same, after the divorce.
Small family businesses can pose a host of complications in a divorce process, which need careful attention to ensure that same is valued properly to effectuate an equitable final property division, and all assets and liability are accounted for. First, the business itself has an inherent value, if sold to a neutral third party. As such, a business valuation is necessary to be performed by a reputable business valuation firm or CPA, which an attorney can recommend, or you can find. Depending on the scope of the evaluation, and how well the books and records of the business are maintained, a business valuation could run approximately $5,000 to $10,000. More information about business valuations specifically can be found on our prior blog post at: https://ciyoudixonprod.wpengine.com/family-law/divorce/business-valuation-determining-numbers-in-divorce-matters/.
Another that may arise, beyond just valuating the business itself, in a divorce that includes a small or family business; include things such as the actual property the business sits on, and obtaining an appraisal of the building and land. Also, in many small or family businesses, a car, or cars, may be owned by the business entity, but used by the owner for dual business and personal uses, and may ultimately be that person’s only vehicle. As such, if one spouse is being bought out of the business and his or her primary vehicle is owned by the business entity, same must be “purchased” from the business, before title can be transferred to the spouse as an individual. Other things such as cellular phones, which serve a dual business and personal use, will have to be considered as well.
Thus, a divorce that includes a small or family owned business can be somewhat complex in order to consider and factor in all the different aspects of business and property ownership, and assets and liabilities of the marriage.
We hope that this blog post has been helpful in understanding how the ownership of a business will factor in to divorce proceedings, and all the variables that will need to be considered. Every case is different, and it is recommended that you consult an attorney to determine the best course of action to achieve your goals in your specific case. Ciyou & Dixon, P.C. practices throughout the state of Indiana. This blog post was written by attorney, Lori Schmeltzer.