As a reader of ROI-NJ, you might be the owner of a business or otherwise have a meaningful ownership interest in one. Do you ever wonder what would happen to your business in the event of a divorce in New Jersey? Here are four questions you may want to consider if you are contemplating or going through a divorce, which, depending on your circumstances, may come as either good news or bad news.
Q. If I own a business, isn’t it just mine?
The short answer: no. In general, absent a premarital agreement, a business owned during a marriage is a marital asset. And, while the premarital value of your business is not a marital asset, the increase in its value during the marriage is. In the event of divorce, the value of the business or the increase in its valuation over the course of a marriage, is subject to equitable distribution — shared between spouses. What does that mean? Is it “divided 50/50”? The short answer: no! When it comes to a business, this is one asset that is not divided equally. In general, the business-owner spouse will have to “buy out” the nontitled spouse for less than 50%. How much less, however, is fact-specific.
Q. If I am a titled owner of a business and my spouse wants to be my business partner after we are divorced, do I have to agree?
In general, the short answer is: no. While nothing prevents you and your divorcing spouse from entering into an agreement that makes you business partners after your divorce, a court would not require you to do so. Divorce is about dismantling your marital partnership. While we may never give up hope that we will one day see a unicorn, chances are, if you are divorced, there is a very good reason not to be business partners with your spouse, either. As noted above, it is more likely if you intend to carry on in your business that you will have to “buy out” your spouse.
Q. If I am buying out my spouse on account of my business value and my business is valued based on the income that the business generates, do I still have to pay alimony?
The short answer: yes. Although business values may take into consideration future earnings, in general, those same future earnings will likely be considered by a court when assessing a support obligation — alimony and/or child support, whichever may be applicable.
Q. If I keep cash in my business, does that reduce my income for support purposes?
The short answer: no! While it is not uncommon to hold cash in a business, or to save monies for reinvesting into the business, expanding, purchasing new equipment, etc., holding onto cash in a business will not shield the monies from your spouse in a divorce. If you leave money in a business and do not distribute it to yourself as profit or salary, it is still part of your income for support purposes. And, if you hold onto earnings and/or have a stockpile of excess cash accumulated in your business bank account, expect your spouse to seek half when you are going through a divorce. If the cash had been paid out to you, it would be no different than monies in a personal bank account that would be available to be shared. Additionally, the stockpiling of cash in a business may suggest that you should have greater income available for support purposes and/or a greater ability to pay support.
While the foregoing are a sampling of considerations for a business owner contemplating or going through a divorce, they are among a myriad of what may be very fact-specific issues to discuss with your individual attorney, business adviser, accountant and even forensic accountant.
Divorce is not one-size-fits-all, and your team of professionals should work with you and your particular facts and circumstance of your business and the end of your marital partnership.