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Divorce and the Family Business

November 17, 2014

One question that often arises in matrimonial proceedings is how do the courts address one spouse’s interest in a family business?

In the absence of a pre-marital agreement (always recommended if there is a family business), the parties, by their lawyers, have to determine what interest, if any, a spouse may have in the family business that is owned in whole or in part by his/her spouse.  By “family business” we are referring to an entity that was not begun by one spouse during the marriage.  Many small or medium size businesses are begun by a parent, grandparent, or other member of an older generation and employ and are eventually owned by a member of a subsequent generation who is now involved in a divorce proceeding.

The first question that must be addressed is the form of the business.  Is it a proprietorship, a partnership or a corporation of some type?  The next question is the amount of ownership. The third and perhaps the most important question is the origin question.  How did the spouse acquire the ownership interest?  Whether the involved spouse is an owner, a partner, or a shareholder, it must be determined how that interest was acquired.  There are three usual ways the interest can be acquired; gift, inheritance or purchase.  If gift or inheritance, there may be a non-marital property component and a marital property component based on any appreciation or growth in the business.  If the interest was purchased (for fair market value or at a reduced cost due to family considerations), the asset is much more likely to be marital property, subject to valuation and division.

As can be seen from the above, this is a complicated area of the law.  An attorney experienced in these issues and a forensic accountant are necessary parts of the team that will lead to the best possible result for either party.