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Owning a business can bring a lot of strain on many parts of your life, including your marriage. If that marriage breaks down, you need to know what divorcing as a business owner means for you, your spouse, and your business. Understanding how the Michigan courts treat family businesses can go a long way to reducing litigation costs and reaching a settlement that keeps the company’s doors open.

Business Owners and Divorce

For many business owners, their business is their life. When business owners get divorced, their status as entrepreneurs can impact every aspect of their case, from property division to child and spousal support. Understanding the ways that business ownership can affect your divorce can help you make strategic decisions in your company, and with your family law attorney. The range of ways that divorce affects business owners is too big for a single blog post. But here are some ways you can expect your entrepreneurial efforts to come into play in family court.

Is Your Business “Marital Property”?

The first question in business ownership and divorce is whether the company is “marital property” that the Court needs to consider when allocating marital property as a whole. The answer depends on a lot of facts, including whether it is a family-owned business that the owner does or does not work in, and whether the business was started before the marriage with non-marital resources . Under Michigan law anything either party actively made, earned, or created during the marriage (with certain exclusions) is considered “marital property” and can be taken into consideration as part of the divorce. If you opened a business during your marriage and worked to make it successful and profitable, then your spouse is entitled to an equitable portion of the value of that business.

To an extent, this may even be true if your business is older than your marriage. This is because your “active appreciation” – the work you did to maintain your business and increase its value during the marriage – is likely enough to cause that increase in value to be considered “marital property.” And that means your spouse is going to be entitled to a portion of the change in value unless there are other extenuating reasons that would not be “equitable.”

What Happens to Business Interests in Divorce?

It is important to know it is unlikely that divorce will result in the end of a business. Judges aren’t interested in putting parties out of work (especially when there are children or spousal support is involved) any more than they are interested in destroying any other marital asset. Nor will most judges require the parties to work together in, or co-own, a family business after the divorce is over, even if the non-owner spouse was working for the business before the divorce. Some couples agree to these kinds of arrangements voluntarily - for example if maintaining the non-owner spouse on the payroll can legally be done in lieu of paying alimony - but it is rarely ordered against the parties’ wishes.

Instead, when a business owner’s divorce goes to trial, the judge will generally award the business, along with all equipment, inventory, company bank accounts, accounts payable, and any other business assets to one spouse (generally the one with closer ties to the business’s operation). That spouse will also be required to take on the company’s debt and financial obligations, including potential future tax liability: however, the other spouse will typically be awarded a sum representing their equitable portion of the marital value of the business along with a corresponding portion of any then-existing potential liabilities relating to the business. For example, if there is a lawsuit pending against the business, the non-owner spouse may have to share in any resulting verdict or judgment in proportion to the amount they were awarded of the business’ value. In other words, you may be required to buy your spouse out of the company, and it may not be a simple proposition. Often, a learned mediator is necessary to help figure all this out if you are going to avoid litigation, which is particularly advisable if your judge is not experienced in how to deal with this type of asset.

How to Protect Your Business from Divorce

To avoid the chance that a business owner’s divorce could award a controlling interest to a partner’s ex-spouse, many closely held businesses’ partnership agreements include mandatory buy-outs in the event of divorce. This can protect your business interests from divorce. If the Judge orders that your shares be divided between you and your spouse, for example, it could result in the company simply buying back your ex-spouse’s shares.

If you own a business prior to the marriage, a premarital agreement identifying those business interests as separate property can also protect your business from divorce distribution. Enforcement of premarital agreements is tricky in Michigan, but a clear prenuptial agreement can limit your company’s exposure to claims by your spouse.

Putting a Value on Your Business

Because most divorces for business owners involve some form of buy-out, establishing the enterprise value of the company to you as the owner (not the company’s fair market value) is an essential step in the process. Business valuations are expert reports completed by professionals skilled in estimating the fair market value of a company as a going concern. Most often, these professionals are certified public accountants with experience in divorce valuations and knowledge of Michigan case law on valuation standards.

Many small business owners vastly over- or underestimate the value of their business. Some business owners fail to consider valuable aspects that don’t show up on their profit-and-loss statements, like goodwill. Anticipated future growth is an important aspect of estimating the company’s current worth, which is one of many reasons a management interview between the owner and valuator is critical. It is best to get an objective perspective on the company’s value early in the divorce process, to avoid having incorrect assumptions skew your expectations for settlement.

In truth, placing a value on your business isn’t an easy thing to do. Even experts will often come to different conclusions based on differences in methodologies, assumptions about the market in your industry, and interpretation of your company’s financial conditions. One way that divorcing couples can help control divorce costs is to agree to use one CPA or business valuator, rather than engaging in a “battle of the experts” at trial. In addition to the extraordinary cost of hiring two accountants to perform the same analysis and then testify about their results, if you don’t use a shared expert you run the risk that the Judge will simply look at the two numbers and choose a figure somewhere in the middle.

Determining Business Owners’ Income for Child Support Calculations

The Michigan Child Support Formula Manual warns that determining a business owner’s income is hard to do. That’s because, unlike traditional employees, as a business owner, you have a lot of control over when and how you receive compensation for your work. Your total compensation may include:

  • Salary or hourly wages
  • Shareholder distributions (from a corporation or partnership)
  • Member disbursements (from an LLC)
  • Employee benefits such as retirement contributions or insurance coverage
  • Perks such as use of a company vehicle and meals during business trips
  • Tax write-offs such as depreciation of business assets and exclusion of business expenses

While you have every right to make strategic decisions that legally reduce your tax burden, and integrate your personal and business expenses, Michigan law says that your children also have a right to benefit from those non-traditional income sources. Because of this, determining a business owner’s income for child support calculations often requires a close look at the company’s accounting records, and the family tax return to find a fair income amount.

“Double Dipping” into Business Assets to Pay Spousal Support

Another issue unique to business owners and divorce is the idea of “double dipping,” or using the same funds to calculate a spouse’s equitable share of the property, and the business owner’s income in calculating spousal support. A Michigan case says that there is no “bright-line” rule against double dipping, and there may be cases where certain funds could apply to both your property and spousal support interests. “Double dipping” arguments are some of the most financially complicated issues in a business owner’s divorce case. You need to work with attorneys (and financial experts) who can help the Court understand the consequences to the value of your business if you are required to pay out additional funds to cover spousal support.

At NSSSB, we have helped many business owners through divorce, protecting their livelihood and legacy, and reaching a fair resolution to their spouses’ property and support claims. Our Ann Arbor divorce attorneys can help you review your financial situation and your options, so that you can end your marriage without putting your company at risk. Call 724-994-3000 or click here to schedule a consultation with our divorce team.