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Is the Family Business Subject to Equitable Distribution in Divorce?

Jan 3, 2023 | Family Law

Divorce is hard enough, but it can be even more stressful when a family business must be taken into account. If you’re an entrepreneur facing divorce, you might be wondering what will happen to the company you worked so hard to build. Importantly, New York follows the rule of “equitable distribution.” All assets and property acquired during a marriage — including family businesses — must be distributed between the parties before a divorce judgment is issued. 

When is a Business Considered Marital Property?  

It’s important to understand that only marital property is subject to equitable distribution in a New York divorce. Separate property belonging to either spouse before the marriage generally belongs to the original owner. Critically, a business purchased by one spouse before the couple was married may be classified as separate property unless there was commingling.

For instance, suppose someone started a company before they were married. If their spouse contributed to the growth of the business or its increase in value, that portion of the business assets would be considered marital property. Both economic and non-economic contributions that helped the business expand may be considered when determining a spouse’s share.  

What Options Do Divorcing Spouses Have Regarding the Family Business?

Spouses have a variety of options when it comes to determining what will happen to the family business in divorce. However, it’s crucial to first conduct a valuation to understand how much the business is worth and negotiate the best possible outcome.      

Some of the options that spouses might consider regarding dividing the family business in divorce can include the following:

  • Sell the business and divide the assets — If neither spouse wants to continue business operations, or they would like to open separate companies, selling the business and dividing the assets between themselves may be a good option.  
  • Continue business operations — If the spouses are amicable and can continue the business relationship, it may be possible to keep the company running after the divorce has been finalized.
  • Buy out the other spouse — A common scenario in divorces is for one spouse to buy out the other if they have enough capital to do so. This means that one spouse would purchase the other’s share of the business and continue operations independently or with another business partner.  
  • Enter into a postnuptial agreement — If divorce is imminent and there is no prenup in place that addresses the family business, a postnuptial agreement should be considered. Similar to a prenup, a postnup can determine how assets and property will be divided in the event of divorce.      

It’s always best for spouses to settle property division matters on their own, outside of court. This can allow them to determine the fate of their business — and remain in control of the outcome of their divorce. But if the parties cannot reach an agreement, a judge will decide how the marital property and assets are divided.     

Contact an Experienced New York City Matrimonial Attorney

Many factors should be considered during the divorce process when making a decision regarding the family business. It’s essential to have the guidance and knowledge of an experienced divorce attorney who can advise you regarding your options and protect your financial interests. The Edelsteins, Faegenburg & Brown LLP provides skillful counsel and aggressive advocacy for divorce matters in New York and is committed to ensuring a favorable outcome for each client. Call (212) 425-1999 to schedule a consultation.  




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