While some divorces are relatively uncomplicated matters, others have special circumstances that need hard work to unravel. One of the most complicated divorce situations is when a family business is involved. The first question that most divorcing business owner-operators must answer is whether the family company is marital property or separate. To help you figure this out, here are five key questions applicable to divorce cases filed in Pennsylvania.
1. When Was the Business Started?
One of the biggest determining factors for most marital property is whether or not a spouse owned it prior to the wedding. As a general rule of thumb, assets that existed before the marriage are considered to be the property of that spouse. This includes things like second homes, vehicles or equipment, some bank accounts, and stocks or business ownership.
This is not a perfect rule, though, and it may be negated by other factors below. So don't discount your share of the business just because your spouse started it on their own.
2. Were There Prenuptial Agreements?
If someone brought an existing business into a marriage, they may have had the foresight to include it in a prenuptial agreement. Generally, legally valid prenuptial agreements that specifically address an asset are adhered to by most states.
3. Who Contributed to the Business?
If both spouses have invested time, money, or effort into building the business, they may both be entitled to share in its rewards. The amount of personal investment in the business may be hard to quantify, though, and could be open to interpretation.
The contribution should be significant, playing a recognizable role in business growth or daily operation. If one partner spent years handling the books for their spouse's medical practice, they deserve some share for their ongoing effort. If they only participated very rarely or in inconsequential tasks, on the other hand, they may not have played a large enough role in the business’s growth or operation.
4. Has the Business Been Co-Mingled?
Property usually becomes marital or community because it is used to benefit the marital home or the entire family. If you bring your own bank account into the marriage but then use it to help pay expenses for the marital home, that bank account could be considered marital property.
Similarly, if profits from your business paid for shared assets like a second home or personal expenses of both spouses, it may have been co-mingled with marital funds. Conversely, if you used any joint assets to pay for business expenses, it could have become part of the shared property.
5. How Was the Business Funded?
Where did the business funding come from? The source of funds is relevant to whose property the resulting asset is.
Money inherited by a person is often considered to be separate property, for instance. If you used your pre-marriage investment account to open a business and then reinvested its profits in the business, that money may never have been used in ways that make it shared property.
On the other hand, what if your spouse contributed from their own money as well? Of if you used a joint investment or bank account or a jointly-owned asset to fund the business? This sourcing is likely to be considered marital property, resulting in a shared business venture.
Clearly, your particular circumstances affect whether or not a family-owned business is part of the divorce. And these circumstances can vary widely or be open to significant interpretation. Both parties' best route to success during a divorce, then, is to work with an experienced attorney who can help navigate this tricky subject. Kalasnik Law Office can help. Call today to make an appointment.