Divorce Can Impact Your Small Business in North Carolina
If you’ve worked hard to build your own small business, it goes without saying that it’s likely essential to you to do all you can to protect that business and ensure that it continues to grow and prosper. But what happens if you are a small business owner who is also facing divorce?
In addition to the normal worries and concerns people have about the divorce process, wondering how a divorce might impact your small business adds another layer of concern. Let’s examine how divorce might impact your small business and how you can prepare for the process.
A Quick Look at North Carolina Property Law
To understand what might happen to your small business in the event of a divorce, it is helpful to understand how North Carolina law generally views and divides property during the divorce process. It’s important to first know that, when dividing property in a divorce, North Carolina follows the rule of equitable distribution. Essentially, this means that when courts are dividing property, they will do all they can to divide that property in a manner that is fair to each party in a divorce. While courts seek to be “fair,” this doesn’t necessarily mean the property will be divided in a 50-50 split. Instead, courts will take a variety of factors and the overall situation of the parties into consideration when making the decision.
As a court determines how it will actually divide the property in a divorce, it’s helpful to understand that there are three broad categories of property in North Carolina.
Ultimately, when North Carolina courts seek to address matters of property division, they will place the property in one of these three categories and divide it accordingly. As a general rule, if a small business has always been a separate property, the court will treat it as such. If not, however, it will be considered an asset of the marriage and addressed accordingly. Regardless, determining the value of a small business will be an important part of the process.
Separate Property
Separate property is property owned by either party before the marriage, and which remains separate after the marriage. It may include real estate that one spouse owned before getting married and other tangible assets, provided that the spouse does not later combine (or “commingle”) those assets with their marital property. Likewise, separate property may include an inheritance or gift that one spouse received after they were married, as long as they made an effort to keep it separate and did not deposit it into a joint marital account for use by both parties. The general rule with separate property is that if it is to remain separate, it should be kept in a separate account or, if real property, with a deed only in the name of the person who owns it.
Marital Property
Marital property is, as it sounds, property obtained and maintained by the parties during their marriage. It can include a wide variety of types of property, including bank accounts, investments, accounts, real property, personal property, and small businesses that the parties formed during the marriage.
Often, in determining whether or not a business is marital property or separate property, a court will consider a variety of factors, including: when you formed the business, the amount of time between the formation of the business and the marriage, the success of the business before and after the marriage, each spouse’s contribution to the business operations and growth, changes in the valuation of the business overtime, and a variety of other factors.
Divisible Property
Divisible property includes changes in the value of marital property after the separation, but before the divorce, as well as property acquired by one party after the separation, but earned during the marriage. It also includes passive income from any marital property received after the separation.
How Is a Small Business Valued?
In many cases, a couple may disagree about a company value during a divorce. As a result, a business appraiser may define and determine the standard of value as part of the divorce process. Generally, there are three approaches to determining the value of a business:
- Asset-Based Valuation: In this method of calculation, liabilities are subtracted from assets to determine value. Business assets may include physical assets like inventory, real estate, and equipment, as well as intangible assets, like accounts receivable, intellectual property, and the like.
- Market Value: This method of calculation is similar to real estate valuation. Appraisers ultimately value a business based on the price of comparable companies recently sold.
- Income-Based Valuation: This is perhaps the most common method for valuing a business. This calculation method uses business history and a variety of formulas to predict cash flows and profits for a business.
Understandably, each of these standards may generate significantly different values. Depending upon the complexity of your business, one method may be preferable over another. Certainly, parties may differ regarding the value of a business. In these cases, each spouse can ask for their own appraiser to value the business before ultimately submitting the evidence to a court.
Like many other issues in a divorce, valuation issues can become complicated. As a result, it is wise to talk to an attorney about the details of your small business and the method of evaluation that might be best.
How To Protect Your Small Business
Understandably, all of this discussion about valuation and division of a business may have you worried about how to protect the business that you’ve worked hard to build and grow. That’s understandable. The good news is that there are a few steps you can take to protect your small business in the event of a divorce. Some steps you can take include:
Enter into a Prenuptial or Postnuptial Agreement
While a prenuptial agreement is entered into before a marriage and a postnuptial agreement is entered into during a marriage, they both serve the same purpose of determining how the parties will address various issues during a divorce. These written agreements are signed by both parties and are binding if and when a divorce occurs. In these agreements, if both parties consent, a business that exists or is created in the future can be considered separate from the marriage.
Avoid Spousal Employment
As a general rule, having your spouse work for you or with you may not be the best idea. Although it may seem like a good idea when things are going well in the marriage, it can become particularly difficult during a divorce. Obviously, each couple knows what is best for their particular circumstances, but considering the option of not working together can decrease complications in the event of a divorce.
Place the Business in a Trust
By placing the business in a special trust, the business may be owned by the trust, and therefore may not count as a marital asset, depending upon the particular circumstances involved in the language of the trust itself. If you choose this option, it is wise to consult with an estate lawyer who knows and understands the particularities of trust law and can advise you on your particular situation and business.
Business Structure and Shareholder Agreement
Structuring your business as a partnership or a limited liability company can help to protect the business during a divorce. Likewise, a shareholder agreement may determine the specific mechanisms for valuing each spouse’s particular interest in the company and may also restrict ownership transfer. Consulting with an attorney who specializes in drafting such agreements and structuring businesses can be a wise decision to prevent difficulties during divorce down the road.
Consider a Buy-Sell Agreement
A buy-sell agreement controls when each business owner can sell their interest, who can buy that interest, and the price that can be paid. These agreements are often triggered when an owner retires, gets divorced, goes bankrupt, or passes away. These agreements are similar to prenuptial and postnuptial agreements in that they are binding upon the parties who sign them.
While these steps are only a few of many that you might take to protect your small business in the event of a divorce, we hope they’re helpful. Ultimately, however, they are no substitute for consulting with an attorney who knows and understands divorce law and a financial advisor who understands your industry, your business, and what other steps you may want to undertake to protect that business going forward. Doing so will ensure that you have peace of mind, knowing you have done all you can to protect the business you worked so hard to build.
The Law Office of Dustin McCrary – Here For You and Your Interests
Going through the divorce process is a stressful event all by itself. Understandably, fearing the loss of the business you worked so hard to build can almost feel overwhelming. That’s why it’s so important to be able to focus on your business and direct your energies in the right direction, instead of feeling burdened by stress and worry. At the law office of Dustin McCrary, that’s where we come in. We’re passionate about helping our clients through every aspect of the divorce process, including helping you understand your options for your small business. Even when you feel overwhelmed, you should know you are never alone. We’re here for you, and we’re ready to help. If you’re ready to get started, give us a call today. We look forward to speaking with you soon.