What Happens to the Family Business After Divorce?

Posted on February 24th, 2021 in Family Law

They say you should never mix business with pleasure yet, family businesses started by married couples tend to always be around. While Entrepreneur reports that it is possible to mix love and business, the unfortunate reality is that not all couples will be able to make it work. But what happens to a family business when the couple divorces?

Is a family business marital property?

In Pennsylvania, marital assets are divided by the “equitable distribution” model. In general, all property acquired by the couple during their marriage is considered marital property. However, property acquired before the marriage or after the marriage if acquired by inheritance or divorce is considered separate property, owned by one spouse.

So where does the family business fit in?

To determine ownership rights to the business during a divorce, the court must determine whether or not the business is marital property.

The court will review multiple factors including:

  • The date the business was established,
  • The funds used to start the business,
  • The contributions both parties made to the business,
  • The skillset needed to successfully run the business,
  • The value of the business before the marriage and at the time of divorce, and
  • The change in the value of the business following divorce.

The answers to the above questions will determine how the business will be distributed under equitable distribution theory. The following situations may occur:

  • 1. The business is marital property even if it was established before the marriage because the parties mingled separate and marital funds during the marriage into the business or if the non-owner spouse quit his or her job to contribute to the business.
  • 2. The business acquired during the marriage is separate property if it was inherited or received as a gift.
  • 3. Prior to the divorce, there was a written agreement between the spouses that may allow just one spouse to be considered the owner.
  • 4. Part of the business is separate property and part of it is marital property.

Obviously, these situations are complex and are not a cut and dry determination of your rights.

What can be done to the family business after divorce?

If the couple cannot come to an agreement about the division of the family business, there are a few options they may have.

Sometimes, the best option may be for one spouse to buy out the other spouse’s interest in the business based upon a detailed valuation of the business. Or, the spouse keeping the business may choose the give up other marital assets to cover the appropriate share of the business.

If neither of those situations are favorable to the couple, the business can be sold outright and the proceeds split between the spouses.

How can I avoid conflict with the business in the event of a divorce?

While no one thinks they’ll get a divorce, it does happen quite often. However, when a family business is involved, the best way to prepare for a potential split is to draft a prenuptial or postnuptial agreement. These documents will allow you and your partner to determine what should happen to the business as well as any other marital assets should the marriage end.

In addition, litigation is always possible, though it can be costly and drawn out, meaning you not only are spending time, but you could be wasting your resources that otherwise would have been saved if you had drafted a prenup or postnup.

Breaking up is hard to do, but when a family business is involved, it may seem impossible. However, Attorney Craig Kalinoski can help you in your division of marital assets or in the creation of your prenup or postnup agreements.

Protect the Family Business From Divorce Fall Out with Kalinoski Law Offices

Our family law firm is committed to achieving the desired outcome of your case. We will review your rights in the marital distribution of assets and determine what share of the family business is rightfully yours. For more information, contact our Scranton, Dickson City, and Moosic family law firm for a free initial consultation.

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