Divorce is no doubt a grueling, emotional process, so, understandably, most people have a hard time stepping back to see the negative impact it has on our lives when in a more emotionally vulnerable state. Business owners, for instance, tend to have more to lose when it comes to a divorce case and can even get into trouble with the IRS. It’s difficult and complicated to divide property, which is why it is so important to have an experienced attorney by your side during this process. A divorce attorney will work with you and the court to ensure your business stays intact and you can have the full scope of potential tax considerations and processes.
Often, the first question asked when divorcing a spouse you share a business with is: “Who gets the business?” In this article, we try to answer that question by gathering information on how a business is treated in the divorce process and the potential outcome for both spouses.
Dividing Your Business In Divorce
Alabama is an equitable distribution state, meaning assets are distributed fairly and equitably. If your spouse owns a business, you might be entitled to partial ownership or half of what the business is worth. It’s important to note that fair and equitable does not always mean a 50/50 split.
Is Your Business Marital or Separate Property?
Marital property includes assets obtained during the marriage, while separate property includes assets obtained before or apart from the marriage and not commingled in the marital estate. In Alabama, the courts treat almost all property acquired after the marriage as marital property, but there are exceptions. This is true even if the property was not purchased together. It is difficult to determine who owns what assets in a divorce, so often, the courts divide the property in a way that seems fair amongst both parties. This means, in general, that property is considered marital assets and will be subject to division in court.
Unlike most property, business assets acquired before the marriage or after it ended are sometimes excluded from the property division as they are considered to be separately owned assets. But, if the assets were used to benefit the marriage, or the non-owning spouse helped contribute to the business, they may be considered marital assets.
During a divorce, it is very important to ensure the transfer occurs under conditions that do not equal gift tax liability or taxable gain. Failing to do this could cost you or your ex-spouse a significant amount, depending on the value of the property. So long as the property is incident to your divorce, you should be able to transfer it without the assets being recognized as a taxable loss or gain.
Another important consideration when it comes to taxes is to be aware of transfer taxes. It is possible to avoid gift tax depending on when the transfer takes place. Sometimes, the only time to transfer the property is after the divorce decree has been entered in order to avoid transfer taxes. However, knowing how the law applies to you in your specific situation is still important. This is a huge reason why having a knowledgeable attorney by your side matters: to make sure no stone goes unturned and to have a guide through the process.
Subject to Division
In the event your business is subject to division, you might have to:
- Sell the business: You might lose control of the business, but liquidating its assets can make it easier to divide it between you.
- Buy out your partner: If your partner has no interest in the business, you can try to purchase it.
- Remain business partners: There may be better options for those who no longer want anything to do with one another. However, some divorced couples can benefit financially by remaining co-owners or business partners.
Business Valuation In Divorce
If a business is a marital asset, a business valuation will take place to determine how much the business is worth and the owner’s salary. On top of property division, the income of each owner is also important because it can affect child support and custody, along with alimony orders.
A business valuation will take these things into account:
- Tangible property
- Intangible property
- Business debts
You might want to determine your business’s value on your own, though we do not recommend this because of how impactful a valuation’s results can be for your finances.
How To Protect Your Business In Divorce
There are a few ways to protect your business, as well as other important assets, in a divorce:
- Creating a pre- or post-nuptial agreement: While nobody wants to think their marriage might end in a divorce, by having a prenup or postnup, couples can work out how property will be divided and cut down on stress if they separate later in life. If you have business partners or investors, they may require you to create an agreement.
- File for an uncontested divorce: Before you file for divorce, you and your partner must agree on many significant issues, like property and debt division, alimony, and child custody/support. It might seem complicated, but you can have an amicable divorce if you work with a mediator and attorneys. Then, as you iron out more details, you can negotiate and make concessions that protect your business.
- Avoid mingling individual separate property: If you come into the marriage with a business, avoid involving your partner in the business operation. It is also important to keep business funds as separate as possible.
- Work with an experienced attorney: Knowledgeable attorneys can help clients protect their assets and interests and give many options for individual situations.
Alabama Divorce Attorneys At Brackin Law Firm
With so many factors to be considered when it comes to who gets what in a divorce, it’s hard to have a direct answer found online. If you are a business owner looking for guidance through a divorce, we’re here to help.
At Brackin Law Firm, we can review your circumstances and help you understand your options. We are experienced attorneys who have helped clients throughout Baldwin County since 1986 and continue representing clients in their most challenging moments. We practice Criminal Defense, Family Law, Estate Planning and Elder Law, Automobile Injuries, and Real Estate Matters. Contact us to learn more and protect your assets for the future.