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Special Challenges for the Small Business Owner in Divorce

You often hear divorce lawyers saying that there are “special challenges” for virtually everybody in divorce: special challenges for men, special challenges for women, for the young, special challenges for the young and old, the rich and poor, the list goes on. And while this can occur in some divorce cases, the truth is that courts deal with men and/or women in every divorce. They have to.

And whether you’re rich or poor doesn’t determine whether you get divorced. Young people divorce and courts are accustomed to that, old people divorce courts deal with that frequently. But one thing the courts don’t deal with as frequently are the divorces of small business owners.

Judges aren’t small business owners. They work for a paycheck. They don’t instinctively understand your business and your work and work life.

Let’s face it, most people are not small business owners, and as a result the law that controls what happens to a small business into its income isn’t as well developed.

Additionally, the small business owner is a different kind of person. While it is possible for your judge or your court commissioner to owner to have owned a small business, it is more likely that your judge was a W-2 to employee throughout most of his or her career. So not only do courts not deal with the legal side of divorce and small business, judges and commissioners often can’t relate to the small business owner very well.

The small business owner’s lifestyle is different. The way you approach your job is different from someone who’s an employee. The amount of time you spend in your job is often disproportionate to the amount of time an employee spends. The way you balance work with family is different.

So being a business owner really does create special issues as you go through a divorce.

A business you own, whether you started it before or during your marriage, may be an asset that needs to be treated in divorce.

How will investors in your business react to your divorce?

Does divorce mean your business partner can make certain kinds of claims against you?

Will the business be divided equally between you and your spouse? Does that mean you have to sell it off and all of its assets and equipment and then divide the money between you and your spouse? Will you be awarded the business and have the value of the business offset against other marital property that will be awarded to your spouse? Will you be awarded the business, but have to pay your spouse a portion of its value over the next few decades?

Entrepreneurs are often so busy getting their business launched and staying afloat that contemplating what could happen if one or both of the founders gets divorced gets overlooked. But a mom and pop-owned businesses handled wrong in divorce can ruin a business.

A badly crafted decree that doesn’t understand your business can kill the golden goose.

Will the value of the business be accurately determined by your judge? How will you valuate the business? Book value? Capitalization method? The market approach? A combination of different valuation methods?

Will you and your spouse have wildly different ideas as to the value of the business?

Are you going to end up running your business? Are you going to end up sharing ownership with your spouse? It’s rare, but perhaps your spouse will be awarded the business you started. Will the court consider the tax bite from the sale of the business?

What about alimony and child support? If you’re in a traditionally lucrative field, like medicine or dentistry, but in the startup phase, will the court base alimony and child support on what you’re actually making, or what you could be making what your expected to make in the next few years?

Will there be a dispute over what the IRS considers necessary business expenses and what the divorce court does? What about income versus cash distributions? If business profit is considered part of the owner’s income for support purposes, then the same income counted to value the business is being counted a second time, resulting in a potential alimony and child support double dip.

Small business ownership can affect the child custody award.  Small business owners typically work longer hours and more irregular hours than their W-2’d counterparts. That could be a strike against you when it comes to physical custody of children. But if you work from home, or could work from home, being self-employed could be a real boon.

Divorce for the small business owner is, unfortunately, more complex and more complicated than it is for someone who works for an employer. That’s why we pay special attention to the effects of divorce on small business owners. We invite you to review the other resources we have here on divorce and the small business owner. They are here to help you get a better grip on preparing for divorce to protect yourself and your business interests in a way that is fair to you and your family members.

Utah Family Law, LC | 801-466-9277

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