The Family Business and Divorce
In Washington State, a divorce action is started by filing a Summons and Petition for Divorce with the Court and serving copies on the other party (spouse). The Petition requests that the Court dissolve the marriage, divide the property and debts, and may additionally establish a parenting plan and support as necessary.
When a divorcing couple own a business, or are part of a family business, the case may become much more complicated to resolve issues of property and debt division or establishment of spousal and child support. There are two key considerations for business-owning, divorcing couples: 1). Whether the business is community or separate property, and 2). Determining the value of the business.
As part of the divorce process, the Court allocates the property and debts of the parties. Generally, the Court makes this allocation based on what is “just and equitable,” after consideration of the following factors:
The nature and extent of the community property;
The nature and extent of the separate property;
The duration of the marriage; and
The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to a spouse with whom the children reside the majority of the time.
For division of a business owned by a divorcing couple, the characterization of community or separate property is of great importance. This is not always an easy task. For example, a business may be considered separate property if it was owned by one spouse prior to the marriage. However, a community interest may be established in the separate property business, when marital funds are used for the business, such as to make improvements. Or in situations where the other spouse helps grow the business, the separate property nature may be compromised.
Detailed records of initial startup funds, type of business organization (i.e., proprietorship, partnership, corporation, etc.), business income and the like, can help to determine if the business is community or separate property. Ultimately, this determination may change the division of the business drastically.
Determining the Value of the Business
For division of a business owned by a divorcing couple, it's value often must be determined. Washington Courts have generally recognized five methods of determining the value of a business:
The straight capitalization accounting;
The capitalization of excess earnings method;
The I.R.S. variation of capitalized excess earnings method;
The market value approach; and
The buy/sell agreement method.
Typically, a professional business appraiser (often a CPA) is necessary to do a thorough business valuation. This expert usually is trained and has the skill set to appraise a specific type of business, using appropriate valuation methods, considering quantitative date, financial statements, and tax returns, etc. This valuation can have a great impact on the property and debt division of the business in the divorce.
After a business valuation has been completed, the parties can consider several different methods of how to divide the business, including, co-ownership, selling the business and dividing the profits, or one spouse buying out the other.
Business-owning, divorcing couples often benefit greatly by seeking experienced professional assistance to help navigate the often complex issues of community vs. separate property and business valuation.
Family law litigation can be emotionally difficult and complex. Decisions made about each step of the litigation can affect you for many years. We have years of experience helping our clients through the difficulty of family law litigation, including divorce for business-owning couples and can help you through the process. Contact us today at (253) 838 – 3377 or email at office@bainslawfirm.com, to talk about your situation.
Disclaimer: All materials provided on this website have been prepared by Bains Law Firm for general information purposes only and no representation is made as to their completeness or accuracy. Information on this website is not intended as legal advice, and may not be relied upon as such. Only an attorney who can review the unique facts of each case and apply them to the statutes, case law and court rules can provide legal advice. Nothing in this website shall be construed to create an attorney-client relations
