Most business lawyers and owners understand the uses and benefits (mostly) of utilizing a business structure for a family-owned business (or any other business). When properly formed and maintained, such a structure does have many beneficial things; and it has tax benefits and apportions liability between individuals (spouses) and the entity and allows insuring risk and apportioning liability by contract.
These are very important individual and business legal lines of demarcation–at least until a divorce is filed where the family business is the major asset of the divorce estate! There are two key concepts to understand as a litigant to help your divorce attorney make your case theme.
The business has “X” value and there should be a division to account for the benefit it uniquely presents to the other spouse: A business owned by one spouse or both (typically an LLC or corporation, with different tax treatment under sub-chapter “S” of the IRS code) is a third party.
In a divorce, it is very easy for the spouses to throw around business concepts and property (real and intangible) as their own. This is not the case.
Instead, the business is a different legal entity, or legal person, and may not be fully under the divorce court’s jurisdiction. A company car, for example, is not marital property the trial court may order to one party to use during the divorce or award in a divorce decree. This (use) is set by the business entity, not the parties, although it may make little difference in reality.
Nevertheless, a divorce court may consider the value of the benefit of a company car in child support or award the other (non-corporate) vehicle to the spouse who does not have a company car. Stated differently, in most cases, a trial court cannot award the company car for use or set it out in a divorce award because it is the property of the legal business entity, not the parties.
Indeed, this distinction may mean very little during the years the parties are happily married. When the divorce is filed and pends and tried or settled, it is very easy to view the car as the other person’s property. That is not the case, and it belongs to the business entity.
As a general rule, the divorce court may only apportion the spouse’s indicia of ownership, stock in the case of the corporation, or his or her income from the corporation, derived as a stockholder, director, or typically, officer. Thus, a divorce court may not act in ways that directly makes the business entity a de facto party to the litigation.
As a corollary, different business types may have very little value, such as law firms, as an asset subject to the divorce court to value in the division of the marital estate. The value is inherent in a spouse and thus has no marketability to value. By statute, Indiana trial courts work from the presumption of an equal division of property. This may result in the odd situation where the family business has little direct value in the total marital estate.
For example and stated differently, where the company business is central to one party’s (typical professional) skill set, it may have little value under established accounting and valuation methods. As such, an equal property (assets and liabilities) division made by a trial court may appear inequitable and is hard to reverse on appeal.
This is where good advocacy and an education on point by a client may make the difference in the division.
Is this your case?
The important point to remember is a trial court has limited legal authority to control a business entity of the marriage. Moreover, certain businesses, while affording a high standard of living during a marriage of any length, may not translate the same way in a divorce. The key is having a good legal advocate and presenting your “story” to any of Indiana’s dedicated trial court judges.
Ciyou & Dixon, P.C. advocates handle divorce and post-decree cases throughout the State of Indiana. This blog post is written by Bryan L. Ciyou, Esq.