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Is a small business considered marital property?

Your business is not just one of your most valuable assets. It also represents hard work and passion, and because of that, is worth far more than numbers on a balance sheet might indicate.

During a divorce, it is natural to want to protect your business. Its vulnerability depends, in large part, on the outcome of property division, and whether the business is marital or separate property.

Types of property

During property division, separating spouses are tasked with splitting marital property between them in an equitable manner. Note this does not mean 50-50 down the middle. Rather, it is based on what is fair given the circumstances.

Only marital property is considered for property division. Very generally speaking, this means any asset the couple acquired from the date of the wedding onward. For the most part, it does not matter who paid for it or for what reason.

There are a few exceptions. The following are usually considered separate property, and off-limits during property division:

  • Any asset obtained prior to the marriage
  • Inheritance given directly to one spouse
  • A gift from a third party to one spouse
  • Assets gained solely through the use of separate property
  • Property obtained due to certain court judgments

Is a business separate or marital property?

With rare exceptions (such as the existence of a prenuptial agreement stating otherwise), if you formed the business after the marriage, it is marital property. You will need to account for this during property division discussions.

It would seem fair to assume that, if you started your business prior to the marriage, it is separate property. The reality is more complicated.

If marital funds were ever put into the business, that co-mingling could result in a portion of the business being considered marital property. Similarly, if the business’ value increased during the course of the marriage, that growth might be relevant for property division negotiations. And if your spouse became involved in running the business, that can also complicate matters.

There are solutions to this. It’s common for one spouse to buy out the other, or offer up other valuable marital assets in exchange for retaining control of the business. Those ready to move on entirely could sell the business and divide the proceeds.

The correct path forward depends entirely on your specific goals and the circumstances surrounding the divorce. With the right approach, you can head into this new chapter of life feeling good about the future of your business.

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