Spouses who are business owners face unique challenges when a divorce or marital separation occurs. At Pollock Begg Komar Glasser & Vertz LLC, we are frequently consulted by commercial, corporate or transaction attorneys to help their clients understand how to preserve their business and controls in case of a possible divorce. During the divorce proceedings, we want to make sure our clients have an interim estate plan and then transition to a new estate plan as the case concludes. We work closely with attorneys and accountants who are involved with the business, and we have established long-term, fruitful relationships with forensic accounting firms who will assist when business valuation is at issue.
What will happen to my family business if I divorce?
If the business was created during the marriage, then the value of your ownership share might be included in the marital estate to be allocated by your property settlement agreement, or the court, in equitable distribution. If the business was formed prior to the marriage, then the increase in value may be included instead. Operating the business smoothly during the separation period and making a transition to the post-divorce circumstances is one of the highest priorities for our attorneys.
A well-drafted prenuptial agreement can make sure business interests stay in the family in the event of divorce. Similarly, stock restriction agreements and closely held business agreements may be drafted with an eye toward making sure the family business survives when the marriage between the owner spouse and non-owner spouse does not. Quite often spendthrift language, rights of first refusal and detailed dissolution provisions are employed in operating agreements for precisely this purpose.
Even if the value of a family business is included in the marital estate, there are measures that can be taken to ensure the smooth continuation of that business. For example, the business might utilize an employee stock ownership program to purchase the interests of a spouse who acquires stock in the divorce, or may instead create a class of nonvoting stock for the non-owner spouse. This stock may include call features to allow the business to liquidate the spouse’s interest at a future date. Alternatively, the non-owner spouse may be compensated through the issuance of debt by the company. This might be the preferred option in cases where the owner spouse will have significant ongoing financial obligations to the non-owner spouse.
If I am the non-owner spouse, will I be compensated for my contributions to the family or to my spouse’s family business?
The divorce law of Pennsylvania is called equitable distribution for a reason. The commonwealth recognizes in marriages, often the non-owner spouse may support the business and the owner spouse by fulfilling the role of primary parent and manager of the household, enabling the owner spouse to devote more time to increasing the value of the family business. The spouse may even have been employed by the family business and received only a nominal compensation. These factors are considered by the court when deciding what percentage of each marital asset should be awarded to each spouse to ensure the overall distribution scheme is, in fact, equitable.
In addition, the owner spouse is not permitted to shield income which would otherwise be includable as income or as a marital asset by accepting a salary inferior to actual contributions to the business.
The family law attorneys at Pollock Begg are adept at handling complex divorce and separation cases, which include business succession planning.
Call our office before beginning your proceedings to make sure you have adequately protected your business assets.