Business During a Georgia Divorce
Suppose that you and your spouse started your own business, such as a partnership, LLC, professional practice, or corporation whose shares are not traded publicly, particularly the ownership interest (the shares, member, or partnership interest). In that case, the business would then be a marital asset that could be divided following a divorce. Georgia is not a community property state, but an equitable distribution state.
This means that not all assets that spouses acquire during a marriage are automatically classified as community or shared property. The court will divide property between spouses in a way that is considered equitable or fair. When deciding who should own a business, the law permits some ambiguity. Even if one spouse owned or have an interest in a business before the marriage, if the business or interest increases in value during the marriage due to the efforts of either spouse, then this appreciation is a marital asset subject to division in a divorce.
An acquired business during the marriage would not be considered marital property if:
- One spouse received the business as part of an inheritance.
- One spouse received the business as a gift from a third party.
- One spouse received the business as part of a court judgment.
- Both spouses signed a prenuptial agreement designating how the property will be divided.
However, the only appreciation that can be attributed to “market forces” is not a marital asset that can the divided. Refer to Sullivan v. Sullivan, 295 Ga. 24, 757 S.E.2nd 129 (2014).
What if the business is a small business?
There may not be much value in the ownership interest itself if the company in question is a small business that is completely owned by the spouse, has few corporate assets, and depends entirely on the spouse’s labor. Refer to Zekser v. Zekser, 293 Ga. 366, 744 S.E.2nd 698 (2013). Therefore, it may not be worthwhile to try to make a marital claim on the spouse’s business. Each case’s facts and circumstances are unique, thus the judge would have to base his/her decisions on these circumstances. However, if there is material value in your spouse’s business or interest in a business, for instance, a member’s interest in an LLC or a partnership interest in a partnership, a qualified expert witness is required to examine the business and all of its financial records in order to value the ownership interest (with the addition of any “enterprise” goodwill), as of both the date of the marriage and the date of the settlement or final trial.
The three methods for estimating a closely held corporation’s value are:
- The income or capitalized earning method
- The market approach method
- The cost approach method
The trial court can choose which valuation method it will apply. Refer to Sullivan v. Sullivan for more information.
What happens if the business can not be run together?
Unless the spouses formed a business together and have shown they can run the business together after the divorce, the business or specific ownership will usually be given to the spouse who owns the shares. However, additional marital assets may be used to offset the present value of the business or the spouse’s specific ownership interest as of the settlement or final hearing. Alternatively, the non-owning spouse may receive “business alimony” from the court. This is an alimony award similar to property division to offset the award of the shares to the owning spouse. Refer to Miller v. Miller, 288 Ga. 274, 705 S.E.2nd 839 (2010).
Division of Business During the Divorce
Cases for business evaluations can be expensive and time-consuming. The party attempting to instigate the value of the business must first acquire all financial records showing the value of the business both during the marriage and the time of the divorce. Whether the business is an LLC, corporation, partnership, or professional entity, the business is treated separately under the law and is entitled to object to the production of sensitive financial information. Before an expert witness or business appraiser can begin his analysis, it may be necessary to add the business as a party in order to collect this information.
While Georgia courts have total discretion when allocating marital property, they typically take the following into account:
- The financial situation of each couple
- What the particular property includes
- Evidence of either spouse’s misbehavior leading to the misuse of assets
- The conduct of each spouse during the divorce procedure
- Each spouse’s future requirements.
Depending on the circumstances, courts will typically allocate property in a way that is fair to all parties. But keep in mind that while allocating marital assets, a judge could take into account who caused the divorce. For instance, in a situation of adultery, the innocent spouse may be eligible for a larger settlement if they can demonstrate that the other person cheated.
After gathering all relevant financial information, the expert will attempt to make a judgment of the current fair market value of a business or a specific interest based on various possible strategies. It would be ideal if the spouses could agree on a business evaluation so that each is not having to retain and present confliction expert witnesses. It is essential to provide evidence of the business’s value both at the time of the marriage as well as at the time of the divorce if the business or interest was owned by one spouse before the marriage. Refer to Jones-Shaw v. Shaw, 291 Ga. 252 (2012).
What happens to the business debts?
In Georgia, business debts incurred during the marriage are treated as marital debt and are also subject to equitable distribution, which is the process by which the court divides property between spouses in a manner that is considered equitable or fair, taking into account all relevant factors.
When splitting business debts in a divorce in Georgia, the following specific factors will be taken into account by the court:
- The ways in which each spouse made a contribution to the debt accumulation.
- Income, assets, and the ability to repay the debt for each spouse.
- Existing duties or liabilities of each individual.
- The worth of the company and the spouse’s ownership stake in it.
- The ability of the spouse to carry on running the company after the divorce.
- The impact of the debt on the spouse’s credit rating.
- Additional wishes of the spouses.
In some circumstances, one spouse may be required by a court to assume all business debt. This is more likely to occur if the spouse taking on the debt was the one who made the biggest contributions to the business and/or has the ability to pay back the debt.
Additionally, it’s important to keep in mind that the allocation of business debts in a divorce in Georgia is not always simple. There could be complicated legal issues accounted for, such as how much the business is worth and how much of an ownership stake the spouse has in the company. Furthermore, it is crucial to be ready to present the court with proof of the business debts such as copies of bills, invoices, and loan agreements.
If you and your spouse are unable to come to an agreement over how to divide company debts, the court will make the decision on your behalf. Your financial future may be significantly impacted by how you divide business debts. It is important to make sure that you understand the implications of any agreement or order that you enter into in the future.
This article is written below for informational purposes, and provides a brief understanding about business during a divorce. As always, it is you are advised to consult with a local and experienced divorce and family law attorney. Call us today at 770-609-1247 to speak with one of our experienced and caring attorneys. Contact >>