Does my spouse have rights to my business?
If you run your own separate business, it is your business to run. Your spouse may have a right to a stake in your business or to a fair valuation of their contributions if you divorce. Your spouse may also have rights to use certain property that you own, and the income derived from the business. What this looks like can vary from state to state, and business to business.
You may decide prior to marriage, if you have already started a business, to maintain your business as separate property by entering a Prenuptial Agreement. The agreement can allow you to retain full ownership of your business, but in the event of separation or divorce, your spouse will be entitled to retain other property to fairly compensate them for contributions made during your marriage. If you are already married and you did not make a Prenuptial Agreement, you still can make a Postnuptial Agreement. Each of these agreements may help predetermine the outcome of a Divorce Settlement.
How does divorce affect business ownership?
The answer to this question varies depending on whether you live in a community property state or an equitable distribution state. Also, when you start your business makes a big difference. It can be helpful to approach this question from these four different viewpoints.
You live in a community property state and start your business after marriage. This is the most straightforward of the four scenarios. There are nine community property states:
- Arizona.
- California.
- Idaho.
- Louisiana.
- Nevada.
- New Mexico.
- Texas.
- Washington.
- Wisconsin.
In a community property state, any property acquired after the date of your marriage is equally owned by you and your spouse. If you start your business after you get married, it is property acquired during your marriage and your spouse may be entitled to half of the business upon divorce.
You live in a community property state and start your business before your marriage. This is trickier. If you live in a community property state and start your business before marriage, it may not be considered community property. However, with some exceptions, the business's growth in value and the income during your marriage may be considered community property. For example, if you only cash checks and no longer contribute time or money to the business, you may be able to keep that income separate from your spouse.
Community property states generally consider the value of the business before the marriage as separate property. If you separate or divorce, you may need to consult a financial professional to assess the different values needed for a fair distribution.
You live in an equitable distribution state and start your business after marriage. The other 41 states are equitable distribution states. This means that in the event of divorce, the principles of equity, or fairness, are applied. If you started a business and your spouse's contributions to your family came through other earned income, or keeping the home, your attorneys or a court may devise a way to divide your property that entitles you to most or all of your business ownership, but awards your spouse a fair amount of other assets.
You live in an equitable distribution state and start your business before your marriage. In this scenario, you may be considered the sole owner of your business. However, this does not mean your spouse walks away with nothing. Rather, your spouse's contributions to any growth in value of your business, and the income you earned from your business during the marriage, will be assessed in the event of separation or divorce.
To avoid a court-ordered distribution of assets, you may negotiate a Divorce Settlement that fairly compensates your spouse for the value of their contributions.
When is a business considered marital property?
A business will typically be considered marital property if you live in a community property state, or if you started a business during your marriage in an equitable distribution of property state. Even if you live in a state with equitable distribution of property and you started your business before your marriage, your spouse's contributions to the business during your marriage will be valued, as described above. This could mean anything from actually working for the business, to keeping the home afloat while you work.
If I am married and own a business, is it a sole proprietorship or a partnership?
If you are married and own a business, the ownership structure depends on how it was formed and the business's operations, not necessarily on your spouse. How a business will be divided, or valued, on divorce is a separate matter.
If you started the business on your own, without active help from your spouse or partners, or without forming an LLC or corporation, then you may be considered a sole proprietor. If you and your spouse start a business together without any documentation in place, then you may very well be operating as a general partnership. You may enter into a Partnership Agreement with your spouse to formally become business partners and co-owners. There may be tax incentives for forming a partnership with or even employing your spouse. Whatever type of structure you have, it may be helpful to have a Memorandum of Understanding that outlines the ownership stakes and roles for anyone in your business.
Every business, like every marriage, is unique. If you have legal questions about how marriage may affect your business, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
