When a married couple decides to end their marriage, both the marital assets and debts must be divided during the ensuing legal process of divorce. If a family business is involved, the division of debts and assets can become complicated. Given the complexity of a divorce that involves a business, it is always wise to consult with an experienced divorce attorney about your unique situation. In the meantime, a Murfreesboro divorce attorney at Bennett | Michael | Hornsby explains how a family business might be handled in a Tennessee divorce.
Division of Marital Debts and Assets
In any Tennessee divorce, the parties must divide the marital debts and assets. Tennessee is an “equitable distribution” state, meaning that if the court is forced to divide assets they must be divided fairly, not necessarily equally. Before assets can be divided between the parties, however, they must be classified as marital property or separate property. Only marital property is subject to division in a Tennessee divorce. Despite referring to a business as a “family” business, the debts and assets of the business may or may not be marital property.
Is Your Family Business Marital Property?
Numerous questions should be considered when deciding if the assets and debts of a family business are marital or separate property, such as:
- Was the business established prior to or after the marriage?
- Did one or both spouses contribute time and/or assets to start the business?
- Who operates, manages, or works for the business?
- Is there a prenuptial agreement that addresses the business?
- Was the business inherited by either spouse?
- If the business was owned by one spouse prior to the marriage, is it more valuable now?
As a rule, assets owned by either spouse prior to the marriage are considered separate property whereas assets acquired during the marriage are considered marital property. There are, however, some important exceptions to the general rule. For example, Assets inherited during the marriage are considered separate property while previously owned assets can become marital assets if they are co-mingled during the marriage.
It is important to understand that even if your spouse is not a legal owner and has never participated in the running of the business, he/she is still potentially entitled to benefit from the value of the business in a divorce.
How Is a Family Business Divided in a Divorce?
Once it is agreed upon, or determined by the court, that a family business is, indeed, marital property, it becomes subject to division in the divorce. At that point, it becomes important to have a professional valuation done to determine what the debts and assets of the business are as well as the current and projected income. Knowing what the business is worth is essential for both parties.
Another important consideration is who will operate the business post-divorce. Although some spouses do share equally in the ownership and operation of a business, that is not typically the case. It is more likely that one spouse is more involved in the day-to-day operation of the business, even if the business is legally owned by both spouses equally. It usually makes sense that the spouse who has been running the business continues to do so and the other spouse receives compensation for his/her share of the value of the business. This can be accomplished by awarding one spouse a lump sum of money, additional marital assets, or even a minority share in the business.
If the business is profitable, it is in everyone’s best interest to find an agreeable solution that allows the business to continue to operate because the income from the business may be used to calculate alimony and/or child support.
Contact a Murfreesboro Divorce Attorney
If you have additional questions about how the family business will be handled in a Tennessee divorce, consult with an experienced Murfreesboro divorce attorney as soon as possible. Contact the team at Bennett | Michael | Hornsby as soon as possible by calling 615-898-1560 to schedule your free appointment.
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