Dividing business assets in divorce

On Behalf of | Oct 20, 2021 | Property Division

In any New York divorce, the parties must divide any separate property from their marital property and then divide the marital property between them in a way that meets guidelines of fairness under state law. This property division process is the most time-consuming and technically difficult part of many divorces, especially if the couple does not have young children.

That said, some types of assets are easier to divide than others. If the couple has a joint checking account, for instance, it’s relatively straightforward to close the account and divide the proceeds. The division may be equal, or it may come in some other form, according to the terms of the divorce settlement. The parties can also negotiate a way to divide ownership of furniture and other personal property.

None of this is ever easy, but the biggest difficulties come with more complex assets, especially those whose value changes over time. For example, real estate can present a challenge. In many divorces, the parties must sell their former home and divide the proceeds.

Family business

Dividing a family business presents unusual challenges in divorce.

First, comes the question of whether the business is separate or marital property. In some cases, one of the parties acquired an interest in the business before the marriage, which could suggest that the business is separate property. However, courts often find that the other spouse acquired a property interest in the business over time. Courts are especially likely to find this to be true if the marriage was of long duration, or if the spouse directly contributed to an increase in the value of the business by investing in it, working for it, or introducing new clients to the business.

Generally, there are three main ways to deal with this type of situation in divorce:

  • The parties sell the business and divide the proceeds.
  • One spouse buys out the other’s share in the business.
  • The parties remain co-owners in the business.

From a business standpoint, remaining co-owners often makes sense, but many people bristle at the thought of staying in business with their ex. As with the family home, selling the business and dividing the proceeds may be the easiest option in most cases, but not for those in which one or both parties really want to keep the business.

This leaves buying out the other party’s share. This can be a daunting task, depending upon the value of the business. However, the parties may be able to work out a plan that works for all involved without overly disrupting the business.

Stock options

Even more challenging are assets that cannot easily be sold and divided. These include retirement accounts and other assets that cannot be withdrawn without incurring significant losses in the form of taxes and other penalties.

Another type of asset in this category is a stock option. As a form of compensation, many startups and other companies offer employees options to purchase stock in the company at a good price at a later date. These stock options can be highly valuable if the company later begins selling shares publicly and the share price rises. But, if the couple divorces before the stock options mature, they may have to divide the value.

Doing so may require hiring analysts who can estimate a value for the stock option before it matures. Of course, this is just an estimate. No one knows for sure the exact value the stock option will have one day.

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Of course, the best way around these difficult issues is to decide them in advance through a prenuptial agreement. When that is no longer an option, dividing business interests in divorce requires exacting work and careful negotiation.