Dissolution of marriage is usually a challenging stage in a couple’s life, while divorce with a business involved can be a real test for both parties. The terms of dividing a business in a divorce in Arizona depend on many circumstances. Even divorcing a small business owner can be time-consuming and difficult, especially when spouses cannot reach an agreement on their own and need court intervention. The determining factor in distributing assets is the time when either party started a business, but there are many other aspects the judge will pay attention to.
Divorce when you own a business may require some special procedures to go through; in most cases, divorce for a business owner will necessitate an assessment of its value and profitability.
In this article, we will analyze the specifics of divorce when you own a business together, the current state legislation on property distribution, and the factors the court considers when sharing assets.
How Are Businesses Valued in a Divorce?
To divorce with a business that is a marital property, you need to determine its value in both contested and uncontested cases. If you can agree on the division of business assets on your own, you can conclude a Settlement Agreement and file it with the court so the judge can review it to ensure your agreements are fair. If you have disputes over the distribution of business, the judge will decide on this issue independently based on the financial information provided by spouses. Due to the need to assess the business, divorce may take longer to finalize.
To determine how much a business is worth, you can:
- Analyze financial statements, including invoices, company balance sheets, reports, etc.
- Engage an appraiser or an expert in the assessment of certain types of assets.
How exactly the business will be evaluated depends on many factors, including its format, type of activity, number of assets involved, profitability, etc.
Several approaches can be used to define the cost of a business:
- Analysis of the company’s assets. Anything that is on the company’s balance sheet, such as equipment, premises, and vehicles, and is used to generate income from the business should be valued to identify how much the business itself will be worth. Business assets in divorce include both tangible and intangible properties. Devices and equipment are tangible, while patents or copyrights are intangible.
- Calculation of income and liabilities. Sometimes, to evaluate a business, experts analyze how much revenue the activity can sustainably bring after deducting debts, loans, and mandatory payments, such as rent. This approach is appropriate if the company does not own a large amount of property but brings a stable cash flow.
- Evaluation of similar companies on the market. This method is based on determining the cost of similar businesses that have recently been sold. Since it can be difficult to find a company with the same assets, this approach is not used very often but may be the only option if the business has ceased to be profitable.
Different methods of business assessment may be applied at the same time. For example, the appraiser can take into account the company’s assets and liabilities, calculate profitability, and draw conclusions based on the market situation in the region.
Having evaluated the business, you can proceed to determining different terms of the divorce, and business division in particular. In the next section, we will analyze the current legislation and discuss the notion of separate and community property.
If you think, “My husband owns a business, divorce will not change its ownership, and I will not get any part of it”, you can be wrong. There are many circumstances affecting who will receive the business assets after the dissolution process is over.
Defining Arizona Community & Separate Property in a Business Context
According to Arizona common law, property owned by spouses during a marriage must be equitably divided between them (AZ ST 25-318). One of the exceptions may be the incarceration of one of the parties (AZ ST 25-318.02).
So, is Arizona a community property state? Although Arizona recognizes all assets and liabilities acquired during marriage as community property, the distribution of ownership in the state is somewhat different from that in other community property states. In Arizona, the court will share marital possession fairly, which, in some cases, is not a 50/50 proportion or equal distribution the judges in other community property states strive to achieve.
Considering Arizona, community property state means that it doesn’t matter whose name is on the title deeds; the main factor in determining ownership is when spouses purchased the property (AZ ST 25-211).
The separate possession of each spouse will not be divided during the divorce; it also applies to businesses (AZ ST 25-213). Separate property includes ownership acquired before marriage, inherited, or received as a gift by one of the parties. Income from its use, such as renting out a house, will also be personal income.
To understand how the business will be shared during the dissolution of marriage, you need to refer to the general laws regarding the division of property in a divorce.
Is my wife entitled to half of my business if we divorce? The answer will be affirmative if you started a business activity after getting married. If my husband owns a business, do I own it too? It is difficult to respond to this question immediately. It will depend on when the husband began it and whether you made contributions to increase its value.
Dividing business profits during a divorce in Arizona can be a complicated task. Judges will consider many factors, as discussed in detail below.
What Do Courts Consider When Dividing a Business?
To determine how a business is divided in an Arizona divorce, the court will first consider whether it is separate or community property. In most cases, when you become the owner of a business – before or after marriage – will be the decisive factor in its distribution. However, investments from joint accounts or any other contribution to its development can affect the conditions of its division.
For example, if you started a business before marriage and maintained it independently, the judge will probably recognize it as separate property and will not share it. If you and the other party opened a coffee shop after getting married and both contributed to its development, it should be divided equally between you.
If your spouse started a business before your marriage, but you began to participate in business development after marriage registration, the court may consider that you were involved in its modification, and your contributions increased its profitability. In such a situation, the judge will most likely divide the business or oblige your spouse to compensate you for your investment.
How are business assets divided in divorce, and what other factors matter? When deciding who will get a business after a marriage dissolution, the court will also take into account:
- the terms of other property division;
- opportunities for self-sufficiency spouses have;
- whether the business is an inheritance or a gift;
- the amount of contribution of each party, etc.
Even if the court determines that the business belongs to both of you and should be divided equally, it may not be easy to do. Since it is a complex set of processes, equipment, and other assets, it cannot be just divided into two parts. Therefore, spouses can apply several methods of sharing the business:
- Sale of business and division of proceeds.
If your business assets are difficult to distribute in kind, you can sell them and share the income in the proportion decided by you or the court. This method is not suitable if the market situation is unstable. It can lead to the fact that you sell it at a low price and lose a profit.
- Purchase of a part of the business.
If your spouse does not want to sell the business and plans to develop it, you can offer them to buy a part that belongs to you. For example, your business is valued at $100,000, and you own 50% of the assets. If the other party compensates you for $50,000, they will be able to keep the business while you will receive the monetary equivalent of your share.
- Remaining co-owners of the business.
If you have a friendly relationship and are ready to cooperate in the future, you can leave the business after identifying your parts in it. That is, you will divide business profits during a divorce in Arizona and after it according to the shares you decide yourself or with the help of the court. If you have 60% and your spouse has 40% of the assets, you can distribute the income in the same proportion and continue to maintain the business.
Given that dividing a business in a divorce can be difficult, you may need to hire an experienced lawyer, especially if your case is contested.
What Happens If There Was a Prenuptial Agreement or Postnuptial Agreement?
What happens to a business during a divorce can be determined not only by you or the court but also by the terms of the prenuptial or postnuptial agreement.
Premarital contracts are concluded by spouses before marriage. According to AZ ST 25-203, they may contain information about:
- what property rights and obligations you will have while being married;
- how you will be able to dispose of ownership during marriage;
- whether one of you will receive alimony;
- how your property will be distributed in case of divorce or death of one of you, etc.
In a prenup, spouses can also determine who will own the business after the marriage dissolution or what the terms of its division will be.
Do prenups hold up in court? Yes, if all the conditions of their legality were observed, they will be taken into account by the court when deciding on your business distribution. The only exceptions can be situations when the document was concluded in bad faith or violates the rights of either party to receive support (AZ ST 25-202).
What should be included in a postnuptial agreement? A post-marital contract is similar to a prenuptial one, but parties conclude it after marriage registration. They use it to define how the business, property, or vehicles they acquired during the marriage will be shared in a divorce. For example, you can enter into it if you want to start a business and prevent your spouse from claiming it in case of divorce.
Therefore, both types of pre-divorce agreements can greatly impact the distribution of business assets during the dissolution of a marriage. In most cases, the judge’s decision regarding the terms of divorce with a prenup agreement will be based on the terms specified in it.