As a business owner, you take pride in what you’ve built and the successes you’ve achieved. However, if you are married, you must know the potential impact of a divorce on your business assets. Depending on the circumstances, business assets can be considered marital property in Michigan. That means they could be subject to the same rules for property division as homes, vehicles, or bank accounts.
Dividing business assets can make a divorce contentious. Having experienced legal counsel to help you understand your rights and fight for your best interests can make business asset division in a Michigan divorce case more straightforward and less stressful.
Determining if a Business is a Marital or Separate Property
When dividing property in a divorce, the court determines whether a spouse’s business ownership interests qualify as marital or separate property. This matters because courts can only divide marital property in a divorce. Under Michigan law, spouses retain sole ownership of separate property.
What is marital property?
Marital property includes all money and assets within the marital estate. Any property acquired during the marriage typically qualifies as marital property, regardless of who purchased the property, how the spouses contributed to the purchase price, or whether the property’s title names only one spouse. As a result, when one or both spouses start a business during their marriage, their ownership interests will usually become marital property and be subject to equitable division in divorce. The business’s assets may also qualify as marital property, including when a spouse owns a sole proprietorship.
Business assets can include:
- Cash in bank accounts
- Accounts receivable
- Stocks, bonds, or other securities
- Inventory
- Equipment
- Real estate
- Intellectual property, such as patents, trademarks, copyrights, and trade secrets
- Confidential business information, such as customer and supplier lists, marketing plans, or product development documents
What is separate property?
In most cases, any property a spouse owned before marriage will qualify as separate property. This means it is not subject to equitable distribution in a Michigan divorce. However, some types of property acquired during marriage also constitute separate property, such as inheritances or gifts intended solely for one spouse. A spouse can convert separate property into marital property by blending it with marital property.
Although ownership interests in a business started before marriage may qualify as separate property, the court may deem growth in the value of those interests as marital property. As a result, the non-owner spouse may have the right to an equitable portion of the increase in value that occurred during the marriage.
What are the Options for Business Property Division?
Dividing business assets or ownership interests in a divorce case can become extremely complicated, especially when the owner-spouse has other business partners or when dividing ownership interests or assets may harm the business.
First, spouses and the court must determine the business’s value or the value of its growth that occurred during the marriage. Spouses can hire professional business appraisers to review the company’s financials and governance structure to determine the business’s total value or the portion of value subject to equitable distribution.
Once the parties and court have determined the business’s value, they have several options for dividing assets or ownership interests that qualify as marital property:
- Sale of the business or the spouse’s ownership interest – An owner-spouse may choose to sell their business and divide the proceeds in divorce. However, selling or liquidating a business can lead to disputes over its value and frequently requires court intervention. If the spouse has other business partners, selling the spouse’s equity stake may prove tricky. The other business partners may not want to use company funds to cash out the owner spouse’s stake, or the company’s governing documents may restrict transfers or cash-outs of ownership interests.
- Buyout of a partner spouse – When spouses co-own a business, the spouse wishing to continue running the business may buy out their spouse’s share to take sole ownership. The buyout may occur with company assets or from the remaining spouse’s assets. The remaining spouse can compensate the bought-out spouse with a larger portion of the marital estate.
- Compensating with other marital property – Finally, a spouse who owns a business may choose to compensate their spouse for their equitable portion of the business with other marital assets of equal value, such as real estate, vehicles, investments, or bank accounts.
Divorcing spouses who co-own a business can also choose to continue their joint ownership. This arrangement may work when spouses own the business as equal partners. However, for this option to be successful, spouses must have an amicable working relationship.
Ways to Protect Your Business Assets in the Event of Divorce
Spouses who own businesses can protect their interests and their business’s financial health and future by planning for the unfortunate possibility of divorce.
Here are some tips for protecting business assets in divorce:
- Negotiate a pre- or postnuptial agreement – You and your spouse can negotiate and sign a pre-or postnuptial agreement that expressly designates your business interests or assets as separate property. You can also use this agreement to determine how to divide the rest of your and your spouse’s property.
- Avoid soliciting investments from your spouse – Asking your spouse to contribute money to or invest in your business may convert separate property business interests into marital property or give your spouse the right to an equity stake in your business.
- Refrain from using marital funds for the business – Using funds from joint bank accounts or other marital funds for business purposes may convert business interests that otherwise might qualify as separate property into marital property.
- Ensure your business’s governing documents have provisions for an owner’s divorce – Businesses with multiple partners can get thrown into chaos by a partner’s divorce since their ownership stake may become involved in the divorce proceedings. Partners can include provisions in their company’s governing documents to address what happens if a partner gets divorced.
Contact an Experienced Michigan Divorce Lawyer for Help
Understanding Michigan marital property laws is crucial for business owners going through a divorce. Splitting business ownership interests can quickly become challenging and controversial. You need experienced legal counsel to protect your rights, interests, and financial future.
The experienced divorce lawyers at Alward Fisher can guide you through the complexities of property division and how state laws may affect the division of your or your spouse’s business assets. Contact us today for a confidential consultation.
- About the Author
- Latest Posts
At Alward Fisher, we provide more than savvy legal representation. We provide peace of mind. Peace of mind for your business. Peace of mind for your family. And the peace of mind for your future. No matter what types of legal challenges you are facing, we can help you find solutions.