Divorce can be a challenging experience for business owners. Not only are you navigating the emotional and legal complexities of ending a marriage, but you’re also tasked with ensuring the survival of your business. In Maryland, as in many other states, a business can be considered marital property, meaning its value may be subject to division or allocation in a divorce.

Whether you’re a sole proprietor, a partner, or the owner of a corporation, safeguarding your business should be a top priority. Here are some key strategies to protect your business during a divorce.

1. Prevention is Key: Establish a Prenuptial or Postnuptial Agreement

One of the most effective ways to protect your business in the event of a divorce is by entering into a prenuptial or postnuptial agreement. A prenuptial agreement, signed before marriage, allows you to define what happens to your business in the event of a divorce. Similarly, a postnuptial agreement, signed after marriage, can also provide this protection.

These agreements can outline that the business is separate property, not subject to division as marital property, or specify a formula for calculating your spouse’s share of the business value. Without such agreements, courts will often default to state laws, which may result in the business being divided or its value factored into the overall marital assets.

2. Separate Business and Personal Finances

Mixing personal and business finances can complicate matters during a divorce. If you have used marital funds to invest in your business or paid for business expenses from a joint account, your spouse may claim an even bigger interest in the business. To avoid this, maintain clear separation between business and personal finances.

Keep separate bank accounts: Ensure all business transactions, including revenue and expenses, flow through a dedicated business account.

Maintain accurate financial records: Keep meticulous records that clearly show the origin of any funds used for the business. If possible, avoid using marital funds for business operations or investments.

3. Understand How Business Valuation Works

In a divorce, the value of your business will likely need to be established. Maryland courts, like those in many states, rely on the process of business valuation to determine how much the business is worth. Several methods may be used, including:

• Asset-based approach: This focuses on the value of the business’s assets minus liabilities.
• Income-based approach: This looks at the business’s earnings, cash flow, or profit and projects future earnings.
• Market-based approach: This compares your business to similar businesses that have been sold recently.

Each method can produce different results, and understanding which approach will be applied is important. Hiring an experienced financial expert who specializes in business valuations is often necessary to ensure that your business is fairly appraised. This step is particularly important if your spouse’s legal team is seeking to inflate the value of the business.

4. Minimize Your Spouse’s Involvement in the Business

If your spouse is actively involved in the business, whether as an employee, co-owner, or contributor, it can further complicate the divorce process. A spouse who has played a significant role in the company may try to claim a larger share of its value.

To mitigate this risk:

Limit your spouse’s role in the business: If your spouse isn’t involved, there’s less of a case for their entitlement to a substantial portion of the business’s value.

Define roles and compensation: If your spouse does work for the business, ensure that their role and compensation are clearly documented. This can help limit any claims that they were undercompensated for their contributions.

5. Negotiate a Settlement that Preserves the Business

Many business owners fear that divorce will result in selling or dividing the business. While this can happen, it’s not the only option. In most cases, both spouses want a fair settlement, and there are ways to structure an agreement that allows the business owner to retain full control.

Options to consider include:

Buy out your spouse’s interest: You can offer to buy your spouse’s share of the business in exchange for other marital assets, such as real estate or retirement accounts.

Structured payment plans: If a lump-sum payment isn’t feasible, you may be able to arrange a settlement where your spouse receives payments over time. This can preserve the business’s liquidity and ongoing operations.

Equitable division of other assets: Offering your spouse a larger portion of other marital assets in exchange for keeping the business can be a way to avoid dividing the business.

6. Consider the Tax Implications

Divorce often comes with significant tax consequences, particularly when business assets are involved. It’s essential to understand how asset transfers, buyouts, or other financial arrangements could affect your tax liabilities. 

Consulting with a tax attorney or financial expert, in conjunction with your divorce attorney, can help ensure that your divorce settlement minimizes tax consequences and doesn’t place an undue burden on your business.

7. Plan for the Long-Term Health of Your Business

Divorce can be a lengthy process, and the financial strain it imposes can impact the health of your business. Try to keep your focus on maintaining the viability of the business throughout the divorce proceedings. This includes staying on top of day-to-day operations, maintaining relationships with employees and clients, and planning for future growth.

To ensure the long-term health of your business:

Seek professional legal and financial advice: Experienced attorneys and financial advisors can guide you through the process and help you make informed decisions that protect both your business and personal financial interests.

Consider business restructuring: Depending on the circumstances, restructuring the business (e.g., converting it to an LLC or corporation) can offer additional protection by insulating personal assets and allowing for more flexible ownership structures.

Taking these steps to separate your personal and business finances, establishing a clear business valuation, and negotiating a fair settlement, can help you safeguard the future of your business while navigating the complexities of divorce. 

Contact Us Today

Consulting with an experienced family law attorney is vital to ensure your interests are fully protected. Rodier Family Law attorneys in Bel Air, Maryland specialize in guiding business owners through these challenges, helping you secure both your personal and professional future.

Contact us today for a consultation.