If you are a business owner contemplating divorce, you should consult with an experienced family law attorney in Maryland to understand how this important asset will be treated in the dissolution of your marriage.
The business or business interest owned by one divorcing spouse may or may not be considered a marital asset in which their spouse has an interest. While courts lack authority to transfer the title of a business or a business interest and alter its legal ownership in a divorce proceeding, a disposition of the marital share of a business may be made. The business valuation process for purposes of divorce can be very complex require the retention of experts.
Does my spouse have rights over my business?
In the state of Maryland, any property that is acquired during the marriage is considered marital property under the law, unless traceable to a non-marital source. Therefore, if you started your business during your marriage, your spouse will most likely make a claim that he or she is entitled to a portion of its value. This is especially true if your spouse has a role in the business. In other cases, your spouse may claim that they made substantial sacrifices to support the business. These sacrifices may include time spent homemaking and childrearing.
Many factors are considered in each specific situation. For example, arguments can be made that your spouse contributed in no way towards an environment fostering appreciation. Additionally, if the business owner can prove that his or her efforts had little or nothing to do with the appreciation, the business interest could be deemed non-marital.
What if I started my business before my marriage?
If you founded, inherited, or were gifted the business before your marriage and can prove it, you have grounds to argue maintaining individual ownership of the asset. However, if your business grew substantially or you increased your time and effort in the business during the time of the marriage, your spouse can claim a portion of the interest in your business. Again, this will depend upon proof that your efforts had an impact on the growth and that the marital environment fostered this appreciation in some way. For example, if a business interest is acquired ten years before marriage, and the owner spouse is a minority shareholder and minimally if at all involved in the decision-making propelling its appreciation, the interest could be deemed non-marital. Conversely, a 51% ownership interest acquired one year before the marriage, in which the spouse played a leadership role, has been determined to be marital property [Innerbichler v. Innerbichler, 132 Md.App. 207(2000)]. Significantly, the legal burden is on the non-owner spouse to show specific actions that transformed the character of the non-marital property to marital, and these efforts cannot be merely tenuous or speculative. [Merriken v. Merriken, 87 Md.App. 522 (1991)].
How can I protect my business before divorce?
Your family law attorney will guide you through the process of protecting your business. You will need to understand how much your business is worth and what claims can be made for your case and against it. Then, your attorney will guide you through a detailed business valuation. Bear in mind that the valuation process for a business during divorce is more complex than a sheer accounting. It involves both a determination of which portion of the business is marital and which non-marital, and how much value is rightly attributed to the owner spouse. Accountants and tax experts, as well as attorneys, will be involved in this process. Dissecting and determining the marketability of a percentage share in a business, and/or its appreciation, and then determining a spouse’s personal contribution to its value, is necessary for allocating the asset according to divorce.
As you prepare for divorce, you will also want to make sure your business is organized. The court is going to review your business and its financial documents closely, so you need to get your books in order. You should also ensure that you are paying yourself a competitive income on par with industry standards. If you are underpaying yourself, your spouse may claim that they are entitled to more of the business because the family did not receive the market value salary. Additionally, ensure that your personal finances are separate from the business and in no way commingled. If marital assets were used to finance or support the business at any point, the court will weigh this against your individual ownership interest.
While the disposition of a business interest during divorce is a multi-tiered inquiry, your interest can be well protected with the right preparation and the help of trusted experts.
Divorce and business valuations are complex and require the knowledge and skills of an experienced family law attorney. If you have questions, please contact TNS Family Law at (410) 339-4100 or info@tnsfamilylaw.com. Our team of attorneys is here to help guide you.
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