What Happens to My Business in a Divorce?

It’s no secret that divorce is a painful, confusing time. Ending the relationship hurts, but uncertainty about the future can be even worse. This is especially true when you are a business owner. You’ve fought so hard to make your business successful, and now you’re worried about losing it all.

Unfortunately, there are no clear-cut answers for what happens next. The fate of your business is directly dependent upon the circumstances surrounding it. To understand, you should first consider the concept of marital property. Next, examine your business’s origins. Finally, investigate how property is divided in Michigan. You cannot predict the future, but armed with this information, you can be more prepared for what happens next.

The Business as a Marital Asset

Each state has its own system of property division. Some split assets equally among spouses, and others attempt an equitable divide. Even within those systems, there are variations on what those terms mean and how they work. There are, however, some commonalities that exist. For example, most states have the same general definition of marital assets.

Generally, a marital asset is anything that was purchased by either spouse during the marriage. Every time Jim buys a new pair of shoes and Sarah spends money on a new video game, those items are technically owned by both parties. The same is true for income. Any money brought in by either party is owned by both individuals. This includes savings, investments, and so on.

You must determine if the business is a marital asset. To do that, think about when and how the business began. The outcome may depend on whether you started the business before or after the wedding.

The Business Existed Before the Marriage

Just as there is marital property, there is also separate property. Again, definitions vary from state to state, but there are commonalities.

Separate property generally includes anything you owned before the marriage, gifts from people outside the marriage, and any inheritance you gained. Knowing that, consider how you came to own your business.

If you owned the company before your marriage, it could belong to only you. As long as your spouse had no involvement in the business, you have a strong argument that you are its sole owner. The same may not be true for any personal profits you earned. Ultimately, that is money that is flowing into the marriage, and your spouse may have claim to at least some of those earnings.

A business you inherited could belong to only you. Again, sole ownership relies heavily on whether your spouse was involved in the business. If ownership was a clean transfer; you immediately got to work; and the spouse was not involved, you have a case for sole ownership.

Your spouse’s inclusion is a key aspect in keeping your business. Even if the business existed before your marriage, your spouse’s involvement changes everything. If they worked for the business in any capacity, they may have some claim to it. If they offered ideas or did anything to help the business grow, they could be seen as part owner.

You Built the Business During the Marriage

This situation is much tricker. Recall that anything acquired during the marriage can be considered a marital asset. All such property falls into this category, and that could include your business.

Recall that earlier, we touched on your spouse’s involvement. Any contribution your spouse made to the creation of your business is crucial in determining how it is divided. Spousal contribution comes in many forms.

First, courts look at how long a marriage lasted. Remember that, in the eyes of the law, you and your spouse are family. Anything you build or earn, even on your own, is considered a contribution to the household.Just by being present for the creation of your business, your spouse may have grounds to claim a portion of it. To counter this, you and your legal team need to prove that the spouse was in no way involved. If possible, you may need to produce evidence that they were directly unsupportive or even a hindrance to your business.

A spouse can make more direct claims of contribution. If they supported you while you built your business, they may have some claim to it. Imagine that you quit your job, went back to school, and eventually started your business. Presumably, your spouse kept you fed during this time. Once your business becomes a success, your spouse has a strong, justifiable claim to at least part of your company.

Even if they didn’t help you financially, they may have helped the business itself. Perhaps they created a system for managing your books. Maybe they came up with ideas, created your logo, reworked the menu, or gave other impactful input. If your spouse can make a substantial claim that they helped create your success, they may be entitled to a portion of your business.

Michigan’s Property Division Model

Like most states, Michigan uses an equitable property division model. In a divorce, it grants property to the most deserving party, which isn’t necessarily the person who paid for the asset.

Let’s take all we’ve learned so far and apply it to your business:

1. Depending on the circumstances, your business may be considered a marital asset.
2. If your spouse can demonstrate a direct contribution to the business, they may have claim to at least a portion of it.
3. Courts will decide who is most deserving to own portions of the business.

You are the owner and, presumably, head manager of the company. Courts typically understand that without your involvement, the business will go under. Unless your spouse has been secretly running the company from the shadows, you will likely be able to operate your business as normal. However, the business could be divided between the spouses.

Dividing the Company

Family law is complicated, and there are many formulas and justifications for how to divide property, especially when spouses share a portion of it. Here are just some ways the court could divide your business, but there are several other possibilities.

Co-Ownership

Your spouse could be given a portion of ownership. Most likely, it will come in the form of a percentage. They could, for instance, become a 30% owner. This will probably grant them involvement and decision-making power for the life of the company. Depending on your relationship with your ex, this could be a blessing or a curse. If this situation seems unbearable, make a plan with your lawyer. There may be ways to get out of this ruling.

Profit Sharing

Perhaps your spouse stays out of the business entirely. However, as a contributor to the business’s success, they could be entitled to receive a portion of the earnings. This could last for a limited time or indefinitely.

A Buyout

If your spouse is given some part of the company, the best solution could be to buy them out. This purchase could be part of the overall divorce settlement. You may also be able to privately broker a deal later. Talk with your attorney and accountants about which option is best.

Defending Your Business

Don’t let any of the above information frighten you. There are effective methods for defending your property.

Attend Mediation

If you and your spouse worked together to build a business, you could possibly work together again. At its best, mediation is a collaborative process. You and your spouse meet with a neutral third party, one who is a legal professional with special training. They can help you negotiate a deal together, one that allows you to keep control of your company while satisfying their needs as well. Coming to terms gives you control of the situation. You won’t be forced to follow a judge’s orders.

Mediation can also give you one last project to work on together. Doing so can help you honor the relationship, and you may even be able to part as friends.

If mediation doesn’t work, the situation may need to go to court.

Make a Strong Case in Court

Remember, when a divorce goes to court, it becomes a legitimate trial. Your attorney can enter evidence, call witnesses, cross-examine, and so forth. Your spouse may have claims that they deserve part of your company, but you have reasons that they don’t.

Secure the services of an aggressive attorney. If your spouse didn’t support the business, you can prove that in court. Moreover, their involvement could have been a direct impediment to your success. Gather your documentation, showing how they stood in your way. Through skillful, deft argument, your lawyer may be able to prove that your spouse has no claim to your company.

Contact us today with questions or concerns about protecting your business in a divorce. We can give you a free consultation, and we may be able to help you decide how to move forward. You can call us at (248) 565-3800 or contact us online.