What Happens to Your Ownership Interest if You Get Divorced?

Many people own stock or other business interests. When the investment consists of stock in a public company listed on a stock exchange, then there is little controversy around how to divide it. Unless a person is very wealthy and owns a considerable share of a company, they probably have no say in how the large corporation is run, so a swap in ownership of shares is easy.

Things are different with ownership interests in smaller companies. For example, a small business might have only 3 owners, each of whom has substantial input in the business strategy. Changing ownership could imperil a small business by putting someone who knows nothing about the business in a position of control.

At Lawrence Law Office, we represent many clients who have an ownership stake in a business. These divorces are often more complicated than run-of-the mill dissolutions, and business owners need someone who appreciates the difference. Contact us today for help.

Identify whether the Ownership Interest is Marital

Spouses can decide how to divide their marital property as they see fit. But when they can’t agree, a judge will divide the marital estate for them.

Generally, only marital property is subject to equitable distribution. If an asset is separate property, then the spouse can leave the marriage with it. Separate property includes assets a person owned before entering marriage, as well as an inheritance or gift in their name only.

The first step is determining whether your business interest is separate or marital. If you started the business while married, then chances are very high it is considered marital. If you bought an ownership stake in a business while married, then it is probably marital also. There might be exceptions, but this is a good general rule.

Even if you started or obtained an ownership interest before walking down the aisle, some part of its value might be marital. For example, you could have started an advertising agency while single. When you got married, it was worth maybe $50,000. Over the ensuing years, however, its value could have increased to $2,000,000. This increase in value, which happened while married, could be considered marital.

Dividing the Marital Estate

If some or all of an ownership interest is marital, then it gets put into a pot with all other marital assets, like your home, retirement accounts, motor vehicles, etc. This pot then needs to be divided.

Not every asset in the pot is divided. Instead, you divide the value of the entire pot. For example, your ownership interest in a business might be worth $500,000. But your home is also worth $500,000. If so, then your spouse could take the home and you could leave the marriage with the ownership interest.

Unfortunately, dividing the estate neatly like this is often unrealistic. For example, your small business might make up the bulk of the marital estate. If you must divide the estate 50/50, then your spouse is going to get some of the value of the business interest.

Protecting Your Interest

Granting an ownership interest to your spouse puts a business in jeopardy. If all you own is 400 shares of Microsoft, then dividing those shares is easy and doesn’t affect Microsoft at all. But if you own a small business like an S corporation, LLC or partnership, then giving your spouse partial ownership dramatically changes how the business functions.

There are steps we can take to preserve the business. For example:

  • Your spouse might take a passive stake in the business. This means he or she will not have any say in how it is run, though will be entitled to a share of profits.
  • You might have to buy out your spouse’s share of the business. You might need to get a loan to accomplish this or make installment payments over a number of years.
  • You might have to sell your ownership interest, either to another owner in the business or to a third party. Some businesses actually have provisions requiring sale if an owner loses their share in a divorce proceeding.

Selling an ownership interest is often only the last step once all other possibilities have been exhausted. At our firm, we can carefully review all options to determine which one works the best to protect your business.

Please contact the Lawrence Law Office today. At our consultation, we discuss your divorce generally and business interests in more detail. If you hire us, we will work to protect your business from being sold or taken from you.