What happens when a business owner divorces? Part 1.

AuthorProudman, Ken

In this part, let's look at buying spouses out and corporate assets.

Whether you are a business owner, the spouse of a business owner, or in business with another family, you may be curious about what impact a divorce can have on the business. If your business partner is divorcing or you are considering going into business with another family, there are also steps you can take to protect the business.

How is a spouse bought out?

There are many potential solutions, such as:

  1. When we are dividing family property, we typically look at all the assets and all the debts. That means that we do not need to address the company and every other asset separately. For most small businesses, there are enough other assets that the business can stay with one spouse, and the other is compensated with more of the remaining family property.

  2. Spouses might also receive credit for property they had before the relationship, or property that was inherited, received as a gift, insurance proceeds, or a personal injury settlement. There are complex rules about what qualifies and the amount of the credit. The point is that sometimes only part or maybe even none of the business's value is shared with the other spouse.

  3. Sometimes a spouse might get bank financing or a loan from family or friends to buy out the other spouse. Or maybe there are enough liquid assets in the business to buy out the other spouse. But buying out the other spouse may not be possible where there are other shareholders or doing so would not be financially feasible, maybe because of the size of the loan payment, lack of available financing, or because taking out funds would leave the business with insufficient funds to operate. Withdrawing assets also leads to significant tax consequences, although those can sometimes be addressed with the help of a tax professional. If the spouse being bought out has no interest in ever starting their own business, we might use up their lifetime capital gains exemption, which minimizes the eventual tax liability of the business when it is eventually sold or liquidated.

  4. Where a buy-out is not possible, spouses might both become shareholders. This is usually a last resort because spouses are generally looking to sever ties. Courts might also refuse to keep them in business together where there is a high risk of a spouse being mistreated by the company due to a history of corporate misconduct.

  5. Sometimes a Unanimous Shareholders Agreement (USA) with other...

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