Business Ownership and Divorce – Part One

women and work after divorce

Perhaps some of you saw the film Joy that starred Jennifer Lawrence as a mom who had a simple household cleaning idea and turned it into a thriving business. While not all of us have the same level of success, millions of us do launch businesses and run them as sole proprietorships or closed corporations (family businesses). But in the event of a divorce, the fate of a business, in terms of both ownership and future viability, may hang in the balance.

How does Missouri law treat businesses during a divorce?

Missouri, like most states, considers any property obtained during the marriage as presumptively marital property. So, in the case of the movie Joy, when Jennifer Lawrence invented her mop, that new item and the new business would be marital property, which means the other spouse has an equal interest in that business.

But it need not be some invention or startup. A lawyer who passes the bar right before marriage and has made partner at a big law firm at the time of a divorce could, depending upon the organization of the firm, owe the spouse a half interest in that growth. The same would apply to a doctor in a medical practice or an accountant in a business enterprise. All business growth during the marriage becomes marital property.

Now some might interject and say, “why should a spouse get to benefit from growth in a company when that spouse had nothing to do with that growth?” That is an excellent question. The simplest answer is that our legal system views marriage as an equal partnership and that spouses help each other become their best selves. The business owner may spend hours and hours at work and the spouse care for the home and children, the assumption being that without those contributions the household and the business could not thrive. The law has seen marriage as the creation of a team of equal stakeholders, and divorce starts with the premise that each spouse has an equal stake in all marital property.

In other cases, the contribution of the other spouse may be more obvious. For example, the other spouse may have made a capital contribution to the business, including putting the spouse through law school or medical school. The other spouse may work for the business, in varying levels of involvement. In these cases, it would be much harder to dismiss the stake of the spouse to half the value of the business.

As you can see, dividing up a business can be the source of complex litigation and could even threaten the health of the business, particularly if both spouses work in significant roles in the business.

In divorce, the courts will look at the organization of the business and the stake any spouse has in it. A business without a formal structure is a sole proprietorship, and the one most susceptible to complete division. Partnerships or corporations that grow but still have ownership mainly vested in the one spouse do not provide enough protection either. Any ownership stake will be subject to division, so the initial question for a business owner is how to protect that stake in divorce.

We will address that question in our next post.

If you have questions about business ownership and divorce, contact us – we can help.