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Divorce: Taking the Family Out of the Family Business

Divorce is never easy, especially when it involves a family business. Often, it is the primary marital asset, and any settlement or award that includes a family business will rarely please everyone. But with planning and cooperation, the dissolution of your marriage may not have to necessarily adversely affect your business.

Before the Divorce

First, while the divorce is pending, spouses need to consider operational issues. Steps should be taken to protect the business and the cash flow, especially if the business is the family’s primary source of income. The Court can issue a Temporary Restraining Order (TRO) so that neither spouse can dispose of assets, hide income or otherwise temporarily harm the value of the business. Another option is to ask the Court to appoint a receiver, a neutral party who will handle and preserve the property, cash and assets and oversee the operations of the business.

Considering Your Options

When determining how to handle the business during and after the divorce, consider these questions:

  • Will one spouse keep the business?
  • Will the other spouse receive value for their interest in the business?
  • Should we sell the business outright?
  • What if other family members or friends have invested?

With the current economic recession, cash flow for the business may be seriously depleted by a “buy out” for one spouse. Even if a buy out is possible, the result may still be a reduction of cash flow or profits, which could impact the remaining owner’s income. If there are children in the family, this could also impact the amount of child support or the ability to pay child support.

Both spouses could retain ownership of the business, but you must consider issues such as control of the operations and strategic management. Also consider whether you can rise above the obvious conflict that caused the parties to end their marriage.

Alternatively, spouses may consider selling the business. However, current market conditions may limit the marketability of the business or decrease the anticipated purchase price. Selling the business could also eliminate one or both spouses’ income earning abilities and also impact child support if there are children of the marriage.

Other challenges may present themselves if the business is owned with other family members or shareholders. Other parties may not wish to be brought into the divorce or to release information related to the operations or finances of the business. A distribution of assets may trigger tax consequences affecting other shareholders or may affect the operations of the business which, in turn, affects the income of the other non-family member shareholders.

Navigating the ins and outs of a divorce and a family business can be complicated—but the right advice can save you time, money and frustration. 

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this page, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this page. Thank you.

  • Partner

    Jan concentrates her practice in the area of complex family law matters including dissolution of marriage, adoption, child custody, child support, prenuptial agreements and guardianship matters. Keefer also has significant ...

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