One of the most contentious issues in divorce is the division of marital assets. This can become even more complicated if one or both of the spouses has an ownership stake in a business. While several factors can affect whether a spouse is entitled to receive assets from a business owned by the other, there are some crucial measures a business owner can take to protect their interests.
Washington is a community property state, which means property acquired by either spouse during a marriage is generally divided equally in a divorce. However, a court will weigh several factors in determining property distribution. For business ownership interests, the initial question is whether they should be classified as separate property or marital property. If one of the spouses started or acquired the business during the marriage, it likely constitutes marital property and is subject to division during a divorce.
Even for ownership interests existing prior to marriage, income or appreciation derived from it during the marriage may be considered marital property. Furthermore, a court may decide the other spouse is entitled to an equity share based on his or contributions to the marriage and the owner spouse’s alleged underpayment of business income to the household. In complex cases, it may be necessary for an expert to appraise the business and ascertain the value of a spouse’s potential equity.
The best way to protect business assets in the event of divorce is to keep them separate from personal assets. This can be accomplished by:
- Using a business structure — Incorporating or forming a business structure such as an LLC or partnership allows assets to be owned by that entity.
- Taking a salary — If the business owner draws a competitive salary, the owner’s spouse is less able to prove that assets of the business were withheld from the household.
- Creating a buy/sell agreement — A shareholders’ agreement can prevent shares from being transferred without majority approval. It can also give other shareholders the right to purchase an owner’s interest in defined circumstances.
If both spouses own shares of the business, they might enter an agreement allowing one spouse to buy out the other’s interest upon divorce.
Another useful way to keep property separate is entering into a prenuptial or postnuptial agreement. Both documents determine how marital property will be divided in a divorce. A well-drafted prenup or postnup can help safeguard business ownership, even if marital and business assets were commingled.
Business asset distribution during a divorce can be complicated and it’s critical to have skilled representation to protect your interests. Bottimore & Associates, P.L.L.C. has been providing reliable counsel to clients facing divorce throughout Washington for two decades. Call 253-272-5653 or contact us online to schedule a consultation at our Tacoma office.