In New York, the division of marital property is governed by the laws of equitable distribution. While there is a long list of factors that go into what is fair and equitable, the bottom line is that, unlike states that have community property laws, such as California, assets are not necessarily divided 50/50.
For business owners, the main question is whether their business is considered to be a marital asset, and will they have to share ownership with their ex, or is there a possibility of losing the business altogether?
Like anything else, the answer is not clear-cut. Many factors can be brought to bear when deciding whether the business is marital property and what equitable percentage your spouse may be entitled to. Some of these factors include:
- Was the business formed before or after the marriage?
- Did the spouse invest in the business?
- Does the spouse work for or assist in the work for the business?
- Was the business started or acquired with joint marital funds?
- How was the business formed?
It is common for small businesses to be considered marital property and be included in the distribution of assets during a divorce. As a business owner, you can do things to protect your business from being included with other marital assets.
Pre or Post-Nuptial Agreement
One way to keep your business separate from other marital assets is to agree that it will be separate. For the agreement to be honored during a divorce, the agreement has to be entered into freely by both spouses without any sign of coercion. The agreement also has to be fair to both sides. A contract that only benefits one spouse can be challenged and even thrown out by the judge.
Corporations have some level of protection when there are clear statements about who can control and run the business. If your company has partners, investors, or shareholders, it is essential that the corporation be formed in a way that protects other stakeholders in your business.
Manage your Salary and reinvestment in the business
Many business owners may forego a salary and reinvest all profits back into the business, increasing the equity of the business. During a divorce, if a reasonable salary is not taken, it could be argued that the money reinvested into the business was essentially a marital asset, giving the spouse rights to a share of the company, even if the business was started before getting married.
Compensate your spouse for their share of the business
During a divorce, you may acknowledge that the business is a marital asset. You may be able to maintain full ownership of your business through negotiations allowing the spouse to keep other assets of equal value. Another option is after the distribution of assets, you may offer to buy back your spouse's share of the business. Either way, any agreement should expressly state that the spouse will waive any future rights to the company in return for other assets or compensation.