Division of Property
Often, when a couple goes through a divorce in Oregon or Washington, one of the most contentious issues is the division of property. Courts use different methods when dividing assets and liabilities in a divorce. Washington, for example, is a community property state. Thus, Washington judges typically divide assets evenly between the parties. Oregon, on the other hand, is an equitable distribution state, meaning that courts will distribute assets to each spouse based on what is equitable, but not necessarily equal. However, in either state, having a business can result in the need for a more complex analysis when it comes to distributing property.
In many divorce proceedings involving one spouse that owns a business, there is a good chance that the business is among the most valuable assets. And while no one gets married planning to later get divorced, the fact remains that upwards of 40 percent of all marriages end in divorce. That being the case, small business owners are wise to plan for what would happen with their business in the event of a divorce.
Divorce is Bad for Business
Divorces can be time-consuming and costly, taking much-needed capital from a small business. Not only that, but in many divorces, ultimate ownership of the business is in question. At the very least, business owners who are going through a divorce find their attention diverted away from the business’s needs, which can have lasting effects on a business’s continued profitability and viability.
Portland Divorce Law - A Business Owner's Guide
Complications of Owning a Business when Divorcing
Owning a business can also make the divorce more complicated. The first step in evaluating the effect a divorce may have on a business is to determine if a business is marital property. Whether a business is considered marital property will depend on the following:
• Whether the business owner’s interest in the business predated the marriage;
• How the business owner acquired the business (i.e. earned ownership vs. gift or inheritance);
• The extent of each spouses’ contributions to the business during the marriage; and
• Whether the business appreciated in fair market value during the marriage;
As noted above, courts must determine the value of a couple’s property before determining a distributing of the assets. While valuing certain types of assets is straightforward, that is not necessarily the case with businesses, and especially small businesses. Valuing a business can be tricky, and valuation determinations are often at the center of the dispute during a divorce. Indeed, even determining how a court values a small business can be the subject of disagreement. Typically, courts use one of three ways to value a small business:
• Asset approach;
• Market approach; or
• Income approach.
In most cases, the parties’ attorneys will retain a separate expert to perform an appraisal using one or more of these methods. This process can become very involved or it can be fairly straightforward, depending on the nature of the business and the quality of the bookkeeping.
Once a fair valuation is agreed upon (or determined by the court), the court presiding over a divorce must determine what will happen with the business. If the former spouses can agree, their proposed solution will almost certainly be approved by the court; however, if no agreement can be reached, the court will be forced to come up with its own solution. The chances of a disagreement are much lower if the parties retain a joint expert appraiser.
If Possible, Take Preventative Action
Not surprisingly, the best time to plan for the potential effects that a divorce could have on small business ownership is well before a divorce is on the horizon. To protect their business in the event of a divorce, small business owners should take the following steps before getting married:
1. Meet with an attorney;
2. Discuss the specifics of the business;
3. Consider creating an Oregon prenuptial agreement; and
4. Consider preparing business organization documents that clarify what can and cannot happen with ownership in the event of a divorce.
Meeting with an attorney is a good first step to protecting a business. An experienced Oregon divorce attorney can help small business owners navigate the process while protecting their ownership interest in a business. Every business is different, and these differences make each divorce that involves a small business unique. The following are facts that may be important to an attorney when determining how best to protect a businessowner’s interests during a divorce:
• The legal structure of the business;
• The other spouse’s past and present role in the business;
• When certain business assets were acquired; and
• Whether the couple has any minor children.
A prenuptial agreement, or “prenup,” is the most common way for business owners to protect their interests from the future valuation or division in a divorce. A prenuptial agreement is an agreement between prospective spouses that defines the legal rights and obligations of each party during the marriage, as well as what will happen in the unfortunate event of a death, divorce or legal separation.
Today, more couples than ever realize the benefits of prenuptial agreements. Indeed, recent statistics indicate that nearly ten percent of couples sign a prenuptial agreement. Prenuptial agreements provide a number of benefits to small business owners. Primarily, a property structured prenuptial agreement can help a business to survive a divorce. Business owners should consider the following tips when creating a prenuptial agreement:
1. Classify any future appreciation in the value of the business as separate marital property;
2. Limit the businessowner’s debt liability;
3. Form a partnership or operating agreement for the business which prohibits a transfer of ownership to the divorced spouse; and
4. Keep accurate and complete business records.
Planning in advance is the best way to protect a business from the potential havoc that a divorce can wreak. By speaking with a family law attorney, business owners who are about to get married can be confident that their business interests will be protected regardless of what the future brings.
When it is Too Late to Plan Ahead
For many small business owners, taking preventative action to ensure the future operation of their business in the event of a divorce is no longer an option. This is often the case for businesses that were formed during the marriage or, in some cases, for businesses that were not addressed in a prenuptial agreement. If no advance action is taken, then businessowners have three options when it comes to what will happen to a business during a divorce:
• Buy the other spouse out;
• Sell the business; or
• Remain co-owners.
When the former spouses are able to agree on what should happen to the business, courts do not typically stand in the way. However, the more the business is worth, the less likely it is that there will be an agreement on all of the necessary issues, especially in the midst of emotional divorce negotiations.
Business owners who missed out on the opportunity to form a prenuptial agreement can still create a postnuptial agreement. A postnuptial agreement is similar to a prenuptial agreement in that it outlines the legal rights and obligations of each spouse, however, a postnuptial agreement is created after a couple is married. A postnuptial agreement is an agreement between the spouses as to what should happen if the marriage should end, and should not be seen as a sign that a marriage is ending.
Postnuptial agreements must be properly structured and phrased to be effective, especially because neither Oregon nor Washington formally recognizes postnuptial agreements by statute, meaning they are far more susceptible to a challenge even if the terms are clear.
Schedule a Confidential Consultation to Discuss How Divorce May Impact Your Business
If you are a business owner and about to get married, or are already married and want to protect your interest in the business, contact the dedicated Oregon divorce lawyers at Gearing Rackner & McGrath, LLP. Our dedicated team of divorce attorneys are keenly familiar with the issues that frequently come up in divorces involving a small business owner. To learn more, and to schedule a confidential consultation to discuss your situation with one of our attorneys, call (503) 222-9116. We represent clients throughout Oregon and Southwest Washington, with convenient offices in Portland and Astoria.