Dividing Business Assets During A New York Divorce
Property division is one of the most complicated areas of a New York State divorce, and business assets are no exception. If you or your spouse or both have a business, then their division gets to be just a little tricky. Under New York’s equitable distribution laws, each spouse is entitled to lay claim to the business even when only one spouse is highly involved with the day-to-day operations of the business.
How Business Assets Are Classified In Divorce
In New York, the first thing done to apportion business assets is to establish whether such a business was a marital property or separate property. The New York Domestic Relations Law §236 explains that marital property includes any asset obtained during a marriage, no matter who holds the title. On the other hand, separate property refers to property obtained before the marriage, or acquired through inheritance or gifts to only one spouse.
A business established before the marriage might be classified as separate property, but its appreciation during the marriage is divisible. Even when a business is determined to be separate, the non-owner spouse may have a claim to a share of the enterprise’s appreciation in the event that the owner spouse benefited from the non-owner spouse’s indirect or direct contributions of support or sacrifices during the marriage. This makes classification and valuation of the business key steps in a New York divorce.
Business Valuation
After classification, the second step will be the valuation of the business. What is required before the New York courts finally decide how to divide the business is a correct business valuation. This may be quite complicated, especially when the business is a privately-owned one, and will involve heavy financial analysis. The expertise of a forensic accountant or business appraiser may thus be required to ascertain what the business is worth, considering its revenues, debts, assets, and its general financial health.
Generally speaking, business valuation includes not only tangible assets, such as equipment and property or inventory, but also intangible ones, like goodwill, intellectual property, and brand reputation. Business valuations are often very contentious, as one party would usually accuse the owner of undervaluing the assets or not showing profits. Commonly, the parties would get their independent appraisals of the business, which may also be a very lengthy and cumbersome process.
Equitable Distribution Of Business Assets
New York is an equitable distribution state, and the applicable statute is Domestic Relations Law §236(B). Equitable distribution does not necessarily mean the assets will be divided 50/50. Instead, the judge considers the particular circumstances of a marriage and makes an equitable division of property. In issuing an order for equitable distribution of the business, among other things, the judge may consider factors such as:
· The duration of the marriage
· The contribution each spouse made to the business
· The reasonable future financial needs of each spouse
· The income and property each spouse currently has
· The earning capacity of each spouse
· Any sacrifices of one spouse on behalf of the business, such as giving up a career to stay home and raise the children
· The tax consequences of the apportionment
· Any other factor relevant to the court
The court can grant the business to one spouse and then offset that gift with other marital assets, such as retirement accounts or real estate. Sometimes, one spouse will need to “buy out” the interest of the other spouse. On occasion, the court may instead order that the business be sold and the proceeds divided between the spouses.
Business Division Options
There are generally three ways a business can be divided up when a divorce occurs in New York:
One spouse keeps the business – In that case, the owning spouse either purchases the other spouse’s interest in the business or gives up some other marital property in exchange for the other spouse’s interest in that business.
Sell the business and divide the proceeds – When neither spouse wants to retain the business or when there is no viable way for one spouse to buy out the other, the business may be sold, and the proceeds will be divided fairly between the parties.
Co-ownership – Although less common, there are instances where both spouses may elect to continue owning and operating the business beyond the divorce. This option works only when the working relationship is sound, and the terms are spelled out, usually in a business operating agreement.
Tax Consequences Of Business Asset Division
One of the most critical considerations for the division of business assets involves potential tax consequences. For instance, selling the business may trigger capital gains taxes, which in turn would reduce the overall asset division amount. Similarly, if one spouse buys out the interest of the other spouse in a corporation, the structuring of that purchase transaction can greatly cause a significant tax liability, sometimes against the interests of either party. That often means working with attorneys and financial professionals who help you understand the tax ramifications of a business division and provide for them within your settlement agreement.
Protecting Your Business During Divorce
As a marriage dissolves, if you have a business, there are things to consider to protect yourself. The best ways of doing this include having a prenuptial or post-nuptial agreement on how the business assets will be divided in the event of a divorce, keeping clear records, and maintaining a line of demarcation so that personal and business finances can minimize complications later when the assets are to be divided.
However, even in the absence of a written agreement to this effect, cooperation, coupled with the close involvement of an experienced attorney, will go a long way in safeguarding your business interests and ensuring fairness in the division process.
Division Of Business Assets Frequently Asked Questions (FAQs)
Can a business preexisting the marriage be marital property? Yes. Even if a business was initiated prior to the marriage, the increase in its value during the course of that marriage might be considered marital property. The court will consider whether the non-owner spouse contributed to the growth of the business, either directly or indirectly, such as by providing financial support or managing household responsibilities.
How Is A Business Valued In A New York Divorce?
The determination of a business’s value for purposes of New York divorce is made by considering the business’s tangible and intangible assets. This may be done by business appraisers or forensic accountants, who review the financial condition of the business, such as revenues and debt, and the goodwill that arises out of the business. Typically, each spouse would hire their own expert to ensure that the valuation is appropriate and equitable.
What If Both Spouses Want The Business?
If both spouses want to continue owning the business, they either buy each other out or can have co-ownership. Co-ownership can be trickier and will need to have specific terms on how the business will be handled over the divorce.
Can A Court Force The Sale Of A Business In Divorce?
Yes. If neither spouse is in a position to buy out the other, or for whatever reason co-ownership will not work out, then the court can order the business sold with the proceeds divided equitably between the spouses.
What Are The Tax Consequences With The Division Of The Business Assets?
The business assets division might have many significant changes in taxation. For instance, there might be a capital gain tax from the sale of such a business. Business asset division should be done in the presence of both legal and financial experts so that the involved processes do not attract too much tax liabilities.
How Do I Protect My Business In Case Of A Divorce?
One of the best ways to protect one’s business would be through a prenuptial or post-nuptial agreement. It can categorically state how the business is to be shared upon divorce. Keeping separate books and records, and separating one’s personal finances from those of the company, will equally help protect the company’s assets.
The Right Firm Is Right Here
If you face the heavy burden of having to split up business assets in a divorce, you will want to have a knowledgeable attorney on your side who knows New York’s complex property division laws. For comprehensive assistance with a high-stakes divorce involving business interests, the legal professionals at Jonna Spilbor Law will provide you with exceptional legal services.
Contact our New York divorce attorneys at Jonna Spilbor Law by calling our Poughkeepsie office at 845-485-2529 or our New York City office at 646-922-9799 to receive your free consultation. We will work with you to protect your business, your assets, and your future. For your financial future, do not take a chance. We will guide you with care and skill through this process.
