Risks to A Business During a Divorce

By Jones & Associates Law P.C.

Business owners in Philadelphia and surrounding areas devote vast amounts of time and energy into running the operation and making sure it continues to grow and prosper. Unfortunately, if their marriage goes sour, many do not realize that there can be financial implications that may put the business at risk during divorce.

The business is often the most valuable asset in the marriage, so when it comes to property division, how the proprietor has chosen to keep it separate from the marriage can help to guarantee its viability coming out of the divorce. Before it comes to this, however, it may be wise for business owners to think about options for safeguarding the business for the future.

Equitable Division in Pennsylvania

Pennsylvania courts make determinations on the division of marital property based on theory of equitable division, which decides on a fair but not necessarily equal division of everything each spouse has acquired during the marriage, including debt. This involves bank accounts, real estate, the family home, as well as business interests, stocks and so forth.

If part of the divorce settlement includes the transfer of part of the business owner’s stock in the company to the other spouse, this could make the ex a partner while diluting the owner’s share in the business. Then, if the ex-spouse has a senior position in the company and chooses to remain, things could get uncomfortable. If they decide to suddenly leave and sell their stock, this could destabilize the company.

Untangling the Business

Saving the business from the chopping block, especially for small business owners and sole proprietors, may involve the drastic step of selling it. This option is viable only if the situation becomes impossible, such as if the other spouse is partner or majority shareholder. Selling your stake to the other partners with the option to buy it back later could save the business from dissolution.

Some business owners offer another asset of equal or greater value than the business interest, such as the family home or other investments. Business owners can also choose to pay the ex-spouse over time for the awarded portion in the divorce settlement to save the business.

Planning Ahead, Beforehand

Even before marriage, business owners often draw up a prenuptial agreement spelling out the relationship of the business to the marriage, its value, defining the sharing of appreciation during marriage, and the spouse’s relationship to the business. A postnuptial drawing up the same details is also possible after the marriage begins. Other possibilities include having an insurance policy on the business or separating finances so there is no investment of marital assets into the business.