ENTREPRENEURS AND EQUITABLE DISTRIBUTION
As an entrepreneur, or a business owner, you know all about busy schedules. You understand the amount of work that it takes to be a successful entrepreneur or business owner. You know the time and commitment you have to sink into your business in order for it to grow. Many entrepreneurs focus most of their time and energy on their business, work long hours, and spend time away from home. Sometimes, your spouse isn’t on the same page and this can lead to the dissolution of a marriage.
It is risky starting your own business. Not only it is financially risky for you and your family, but it is subjects your marriage to risk. Divorce rate among entrepreneurs is higher than average and it is important to be aware of what to expect during a divorce.
Equitable distribution is the equal dividing of assets and debts from a marriage. Yes, the equal dividing of property, regardless of who earned or purchased it.
Automatically on the date of marriage, the couple enters into something called a matrimonial regime. The matrimonial regime is defined in Louisiana statute as a system of rules that controls the ownership and management of property between married persons and to third parties. Essentially, the matrimonial regime determines when, and who property obtained during marriage can go to. There are three types of matrimonial regimes; legal, contractual, and partly legal partly contractual.
Before we can equitably divide the property of the marriage, we need to know all of the marital property. Remember, in divorce proceedings, the term property means more than just land. The term property refers to both tangible and intangible property. Tangible property includes land, houses, structures, vehicles, boats, campers, and electronics. Intangible property includes bank accounts, retirement funds, and pensions.
In order to determine if property is marital property, otherwise known as community property, we must determine if the property was acquired during the marriage. If it was, then it is likely community property (with the existence of a few exceptions).
So how does this affect you as an entrepreneur? Well, if your business was acquired during the time of your marriage, or with community assets, then it will be classified as community property. This means that when property is equitably distributed, you are entitled to half and your spouse is entitled to half. The value of the business will be shared among the spouses equally. If you acquired your business prior to the marriage or with solely separate funds it should be considered separate property and you will be entitled to the entirety of your business.
However, just because the business was acquired before the date of marriage, it does not mean that the other spouse cannot take value from it.
Let’s take a look at an example situation:
Stacy owns a bakery. She started her bakery three years before she married her husband, Ryan. During the marriage, Stacy used $10,000 of community funds to purchase new ovens and equipment for her bakery. Due to the improvements, the bakery saw a dramatic increase in revenue. In this case, if Stacy and Ryan get a divorce, Ryan will be entitled to half of the $10,000 as well as half of the value of any increase in value of the bakery during the marriage thanks to Stacy’s efforts during the marriage.
So there are several things to looks at when determining if a business is or is not a marital asset. First, you need to look at the date of marriage and the date that the business was acquired. Next, you need to look at where the funds came from that were used to start the business or contribute to the business.
Determining the value of a business interest is a very complicated aspect of an entrepreneur’s divorce. The entrepreneur will generally place a lower value to the business than the non-entrepreneur spouse since that would result in giving less value to the non-entrepreneur spouse. Valuation can become a very contentious part of an entrepreneur’s divorce.
There are a few different ways to determine the value of a business. First, and most simple if the parties are able, is that the parties can agree on a value of a business. If the parties are unable to agree on the value of the business, they can agree on an appraiser or accountant to determine the value. If the parties cannot agree on how to determine the value of the business, the court will appoint an appraiser or accountant to assign the business’s value.
After the property has been classified as community property and a value has been assigned, the value will need to be distributed between the spouses. A common way of doing this is having the entrepreneur “buy out” the non-entrepreneur spouse. Simply, the value of the business would be divided in half, and the entrepreneur would pay the non-entrepreneur that amount. In doing so, the entrepreneur has “bought out” the interest that the non-entrepreneur spouse had in the business. A “buy out” can happen in a lump sum payment, or the spouses can agree to payments over time.
Sometimes, instead of “buying out” the non-entrepreneur’s business interest with cash or monetary payment, spouses can trade another asset.
Let’s take a look at an example:
We’ll stick with Stacy and Ryan. Remember that Ryan is entitled to half of the $10,000 of marital assets used to improve Stacy’s bakery, as well as half of the value of any increase in value of the bakery during the marriage thanks to Stacy’s efforts during the marriage.
The value in the bakery thanks to Stacy’s efforts during the marriage increased by $30,000. So this means that Ryan is entitled to half of that, or $15,000. Ryan is entitled to the $15,000 plus $5,000 (from his half of the $10,000), equaling $20,000. This means that Ryan’s business interest in the bakery is worth $20,000.
Conveniently, after Stacy and Ryan got married, they bought Ryan a new truck that is currently worth $40,000. Since the truck is community property each spouse has a $20,000 interest in Ryan’s truck.
Stacy has no interest in keeping Ryan’s truck. So she chooses to trade her $20,000 interest in Ryan’s truck, for his $20,000 interest in her bakery. Through this trade, Stacy has “bought out” Ryan’s business interest in her bakery.
If the parties are on good terms, co-ownership is always another option. This allows each spouse to retain his or her interest in the business. Lastly, the business could always be sold, and then the proceeds could be split. The entrepreneur often does not want to resort to this option, but it is another way that the parties can proceed in distribution.
It is extremely important to remember that property settlements are final. Once you and your spouse come to an agreement, or the issues an order on equitable distribution, there is no changing it. There would have to be exceptional circumstances to modify or alter the terms of equitable distribution. Often this is good news for an entrepreneur. If after your divorce your business becomes extremely more profitable, you can rest assured that your former spouse cannot seek those post-distribution assets.