One often overlooked aspect of divorce: many spouses work together in a small business. In some cases, one spouse is the principal earner; in other cases, both spouses have equal shares and equal value. If the business partnership has been successful, can spouses after divorce continue to make the business work after the marriage failed? The Wall Street Journal has an excellent article on this topic, and we thought we would add some thoughts.
First, not all businesses run by spouses have some formal partnership agreement. In these situations, divorce makes valuing the contribution of each spouse to the business much more difficult. So, the first rule of business continuity would be to have a limited liability partnership or corporation that sets out the specific ownership shares of each spouse in the business and states what would happen to these shares in the event of a divorce (the business must dissolve, the other spouse has a right to buy the shares and singularly own the company, the business can continue if both spouses agree in writing).
Second, the business is essentially marital property that a court would want to equitably divide, but in the bitterness of a divorce one spouse may seek to get more out of the business simply for the sake of “winning” the divorce. But this approach can be shortsighted: any attempt to gouge or attack the business will weaken the business to the point where it may not survive, in which case the spouse wins the battle but loses the war, because the other spouse now has to find an alternate source of income and may not be able to adequately provide for the children.
Third, spouses should consider mediating the future of the business. With a neutral party, the spouses can decide whether they can continue to work together for the overall profitability of the business they worked to develop and that has supported them, or they can choose to dissolve the business in a way that best enables both spouses to more forward in a new enterprise.
Fourth, the size and nature of the business may determine continuity. If the business is a closely held family business with a large number of employees and various stockholders, a simple buyout of shares may suffice. If the business is a real estate company where the two spouses are essentially the company, continuing could be challenging if they no longer can stand each other, but dissolving the company could even be worse if it actually makes both spouses less well off than if they had soldiered on together.
The WSJ article refers to the business as another child of the marriage, and as with custody of actual children, spouses should put the interests of the child first. If the value of the business is bigger than the egos of the spouses, they should see the benefit of continuing to operate a successful business and make it work for the sake of the “child” at issue.
If you have questions about a family business and divorce, contact us – we can help.