In Pennsylvania divorces, courts divide couples’ marital assets equitably, which means a fair but not necessarily equal distribution of assets. Sometimes, a spouse’s business interests qualify as marital assets subject to equitable distribution. However, when do business assets count for equitable distribution in divorce?
Understanding Equitable Distribution
The process of equitable distribution divides a divorcing couple’s marital assets, which include assets acquired during the marriage in which both spouses have an equitable interest. Equitable distribution seeks to divide marital assets equitably, using the factors listed in the divorce code, based on the spouses’ individual circumstances, including the marriage’s duration, their contributions to the marriage, the services performed for the household or family, and the spouses’ respective financial situations.
Although Pennsylvania takes an equitable distribution approach to property division in divorce, some states use different legal systems for dividing marital property in divorce. For example, some states have a community property system under which each spouse has a 50 percent interest in marital property; divorce requires couples to divide their marital property equally or evenly. However, Pennsylvania’s equitable distribution rules mean that spouses must divide marital business assets equitably, using the factors listed in the divorce code, though not necessarily evenly, giving couples options for splitting their marital estate.
What Are Marital Business Assets?
Marital property primarily includes all property acquired by a couple during their marriage. Marital property can also include growth in value during marriage for specific assets spouses acquired before marriage. As a result, a business asset can become marital property if it falls into categories such as:
- An ownership interest in a business started during the marriage
- Growth in the value of a business started before marriage that occurs during the marriage.
What Are Non-Marital Business Assets?
Non-marital or separate property includes most property acquired before marriage and specific categories of property acquired during marriage, such as inheritances or gifts expressly given solely to one spouse. Thus, non-marital business assets can include:
- The growth in value of a business interest before marriage
- Inherited business interests
- Business interests that couples contractually exclude from the marital estate
Blurring the Line Between Marital and Non-Marital Business Assets
Even though a spouse may have started a business before getting married, their business interests may straddle the line between non-marital and marital assets due to various circumstances, such as:
- Increase in Value of a Business During Marriage – A court may deem the growth of a pre-marital business a marital asset subject to equitable distribution.
- Use of Marital Funds on the Business – A spouse may convert a non-marital business interest into a marital asset by adding the formerly non-owner spouse’s name as an owner and perhaps other methods.
How Couples and Courts Handle Business Assets Distribution
When business interests qualify as marital assets subject to equitable distribution, couples and courts must determine the business’s value when deciding how to divide business interests. Parties may use various business valuation methods, such as the asset/book value, market, and income approaches, with the appropriate valuation method depending on factors such as the business’s industry, the nature of its assets, or its present growth stage.
Couples and courts have several options for dividing business interests in equitable distribution during divorce, including:
- Selling the Business – An owner spouse may sell their business and split the proceeds with their ex according to the ex’s equitable share of the business.
- Buyout – When a spouse holds a legal or equitable interest in a business, the other spouse may buy out that interest. The business may buy out the spouse through its funds, or the other spouse may compensate the spouse for their interest by giving up other marital assets of equal value.
- Continued Joint Ownership – When couples who jointly own a business believe they can continue working together after divorce, they may decline to equitably divide the business in divorce and instead continue their joint ownership.
Protecting Business Interests in Divorce
Spouses with business interests can protect those interests in divorce through various means. First, they may negotiate pre- or post-nuptial agreements in which a non-owner spouse waives any interest in the business in divorce. Owner spouses should also avoid commingling marital funds and assets with the business. Finally, businesses can also structure their governance documents and operations to minimize disruptions or risks from an owner’s divorce, such as restrictions on transferring ownership interests.
Contact a Divorce Attorney Today
When you or your spouse owns business interests, those interests may become a part of the equitable distribution process in your divorce. An experienced divorce lawyer can help you understand how divorce affects marital and non-marital business assets. Contact The Law Offices of Dawn K. Gull today for a confidential case evaluation with our legal team to discuss your rights and options.