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Three options for the family business in a divorce

On Behalf of | Jun 24, 2021 | Business Divorce

Owning a successful business with your spouse does not always translate to a successful marriage. Being a business owner in California can be stressful and disagreements can arise. If this stress bleeds into your relationship you may find that you and your spouse are better off divorcing. When this happens, you will have to decide what to do with the business you and your spouse own together. There are three general options: one spouse buys out the other, the business is sold or both spouses keep the business.

One spouse buys-out the other

A buy-out is a common way for spouses to divide the family business. If only one spouse wants to continue running the business, they can purchase the other spouse’s interest in the business at its fair market value. The spouse keeping the business will need to have enough cash or liquid assets to afford the buy-out, although sometimes financing is available.

Generally, a buy-out is not considered a sale for tax purpose because it is a transfer incident to divorce. To qualify as a transfer incident to divorce the exchange must take place within one year following the end of the marriage. A transfer incident to divorce also takes place if the divorce decree requires the transfer and the transfer happens within six months following the end of the marriage.

Both spouses sell the business

Sometimes neither spouse is interested in continuing to run the business. If this is the case, they may wish to sell the business and split the proceeds. Certain factors such as marketability, profitability and economic conditions will have to be kept in mind when selling a business.

In addition, it may take some time to find an appropriate buyer for the business. This means that the spouses will have to come to an agreement regarding how the business will be run until it is sold. Spouses will also have to come to an agreement on whether to accept the buyer’s offer.

Both spouses stay on as co-owners

While this is a more unusual option, some spouses who divorce relatively amicably may decide that they want to continue to run the business together. Doing so requires a certain amount of cooperation as well as constructive communication, so spouses who choose to stay on as co-owners need to be able to put emotion aside and work together as partners. They will also need to develop a plan that outlines what each of their specific roles in the business will be to avoid conflict.

Learn more about property division in California

Deciding what to do with the family business in a divorce can be a hot topic but if spouses are willing to compromise, they can often come up with a solution that is acceptable to them and good for the business. This post is for educational purposes only and does not contain legal advice. Our firm’s webpage on property division may be a good resource for those who want to learn more about this topic.