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Division of Business and Professional Interests

It is becoming more common for divorcing parties to own or have an interest in a small business, such as a sole proprietorship, a partnership, or a closely held corporation. But how does the court divide these types of assets?
 
Characterization of the Property
 
In general, business assets follow the same rules as for division of other assets. Therefore, the first step is to determine whether the business assets are marital or separate property. If the business interest was acquired during the marriage, it is most likely marital property. On the other hand, if it was owned by one spouse prior to the marriage, it may be separate property. However, if either spouse contributed to the business interest during the marriage, either financially or by labor, it could be considered marital property. Also, even if the property is considered separate, any increase in value during the course of the marriage will likely be considered marital property.
 
Valuation of the Property
 
The value of the business, like all other separate and marital property, must be determined for a property settlement award. The property of a business includes all assets, such as physical property, inventory, accounts receivable, bank accounts, patents, and trademarks. Also, business and professional practices may include goodwill, which are intangibles such as reputation, the value of the workforce, repeat business, and general good name of the business or practice in the locality.
 
The value of a business or professional practice will need to be determined by an appraiser with knowledge of business assets. Generally, tangible assets can be determined by either looking at the company’s books to find the sum of the assets and liabilities or by determining the company’s fair market value. The method used in determining the value will depend on your jurisdiction and the nature of the business or professional asset.
 
For a thorough discussion of how to value and distribute business assets, see Valuation of a Closely Held Corporation, Small Business or Professional Practice (Matthew Bender & Company, Inc.).
 
Professional Degrees and Licenses
 
If one spouse obtains a professional degree or license during the course of the marriage, the other spouse may be entitled to a division of the value of the degree or license. The reasoning behind such an award is that the spouse not obtaining the degree helped the professional spouse to obtain the degree by providing income or support or in some way foregoing more income or a higher degree in order to help the professional spouse to obtain the necessary education. Therefore, the spouse who did not obtain the degree or license desires to share in the profits of the degree or license because it was a shared investment of the efforts of both spouses.
 
Division of a Closely Held Corporation or a Partnership Interest
 
Closely held corporations and partnerships have some unique characteristics. In a sole proprietorship, one spouse can buy out the other spouse’s interest. In a closely held corporation or a partnership, this may also be possible if only one spouse actively participates in the business interest. However, if the business is owned and operated by both spouses, continued joint ownership may sometimes be necessary or desirable. Also, if such a family owned business could be awarded to one spouse but that spouse is unable or unwilling to buy out the other spouse, joint ownership may be awarded to both parties. This, of course, can present significant difficulties to divorced parties, so other options should be considered whenever possible.
 
Asset Awards
 
Asset awards will vary greatly based on the jurisdiction, the type of business asset, and the valuation method used. In general, joint ownership following the divorce is not advisable, so one spouse will need to buy out the interests of the other spouse. This buyout could be a property settlement or even a spousal support award, especially if the award is considered to cover future income of the business.   In any case, the property distribution order must be made from the payor spouse’s personal income and assets rather than from the business directly, because the business is not a party to the divorce.