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Divorces and closely held businesses: Myths and maxims

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Business ownership interests pose unique challenges for divorcing couples.

In many instances, spouses are working side-by-side in the business – whether one or both of them hold ownership interest.

 Alternatively, one spouse may be singularly focused on maintaining the home, child rearing and other domestic chores so that the other is able to focus on the entrepreneurial venture.

Frequently, extended family members also are partners, members or shareholders in the business, adding to both the complexity of the legal issues involved and potentially to the emotional stress.

While each divorce and each business are unique, having some understanding of the intersection between the two in advance of starting a new venture or saying “I do” may help to prevent disputes later.

Here are just a few of the common misconceptions that some spouses hold regarding the rights the law affords them and/or the obligations it imposes upon them.

< Myth: I am the only one involved in the business, and my spouse has no ownership interest, so the business is off limits in divorce.

Reality check: Pennsylvania is “title-blind” in its definition of marital property subject to equitable distribution in divorce. Even when only one spouse has a titled legal interest in the entity, the other may still have an equitable interest in the business’ value.

< Myth: My spouse is going to “get” my business, or I am going to have to sell my business.

Reality check: Courts generally want to disentangle spouses, not keep them tied to one another. If your spouse has no knowledge of the business and no existing ownership interest, he or she will not suddenly receive such an interest. Further, courts recognize the sale of a business is neither easy nor optimal.

As with other assets, courts will attempt to offset the value in a business with other assets. Where there is insufficient liquidity, secured payment streams and/or an increase in alimony duration or amount may be considered.

Note: When both spouses have ownership interests – and both are actively involved in running the business (and this is key) – a division of the business may be an option if practical, particularly if there are franchises or services with multiple locations. Less frequently, if the parties are amicable, they may be able to continue to stay in business together with tight parameters regarding salary, distributions, capital expenditures and general operations.

< Myth: I’m just a minority shareholder; my interest is not transferable and I do not have access to any information.

Reality check: Even minority shareholders are entitled to financial information regarding their business interests. Contesting the release of information regarding basic revenue, expenses, profits, losses, assets, debts and taxes is typically not worthwhile in a divorce case and may prove counterproductive by escalating mistrust.

That being said, it is reasonable for the spouse involved in the business to request a confidentiality agreement to protect competitive or other sensitive information and to ensure that use of all information turned over is limited to the divorce litigation.

< Myth: My shareholder, partnership or operating agreement dictates the value of my interest. There is no need for an expert or a business appraisal.

Reality check: While such agreements contain formulas for valuing shares or interests in the event of a buyout, these formulas are not dispositive of value in equitable distribution.

The agreements are informative and should be reviewed and considered by counsel. However, if the spouse without the ownership interest did not sign off on the agreement, he or she is not bound by the value.

< Myth: My spouse makes a very significant income, therefore his or her business must be very valuable.

Reality check: Possibly, but not automatically. Particularly with professional practices, much of the business’ value is tied up in the individual professional. This type of personal goodwill, while valuable, is not distributable in divorce cases.

Moreover, if an income stream is used to determine support or alimony, capitalizing the same stream of income to value the business may be considered a double dip in some cases.

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Business owners should not overlook the potential value of a prenuptial or postnuptial agreement as a way to reduce or eliminate some of the difficult issues posed by divorce.

They also should seek qualified legal advice from counsel familiar with these unique issues.

Lauren L. Sorrentino is a member of the firm and chair of the Norris McLaughlin & Marcus Pennsylvania family law practice, Allentown. She focuses on matrimonial and family law, including divorce, equitable distribution, alimony, prenuptial and property settlement agreements, child support, child custody and protection from abuse. She can be reached at lsorrentino@nmmlaw.com or 610-391-1800.

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