Division of a Business in Divorce

Closely held businesses are subject to equitable distribution during divorce the same as other marital property. However, the form of ownership of the business influences the type of asset available for division. For example, if a business is a sole proprietorship then the business owner owns all of the business' assets himself. These assets could then be subject to division. Whereas if the business were incorporated (an LLC, LLP, S Corp., etc.) the companies actual assets are owned by the business entity - therefore the asset subject to division is the owning spouse's interest in the company.

Under equitable distribution a business interest can be classified as martial property, separate property, or a mixed asset. Only business interests that are determined to be marital (or the marital portion of a mixed asset) are subject to division. Here is how the classifications break down:

I. Separate

A business interest may be classified as a separate property interest if it was owned prior to the marriage, purchased during the marriage with separate funds, or was acquired during the marriage by gift or inheritance.

II. Marital

A business interest may be classified as a marital property interest under a couple of different circumstances:

1. If the business interest was acquired through martial efforts or funds. So if a spouse had started a business during the marriage and built up the business through personal effort, that interest would likely be deemed marital. Also, if a business interest was purchased using martial funds it will likely be considered marital property.

2. If the interest was acquired via joint loans or secured by marital assets. If a business was created/purchased/expanded with a loan that both spouses are obligated to repay, or if marital property was used to secure the loan, then that business or business interest would likely be considered martial and subject to division.

3. If separate business funds "commingle" with marital funds. An otherwise separate business can be converted into a marital asset if marital and business funds are extensively commingled. Such an example might include having marital funds in business accounts, business funds in martial accounts, and using separate business funds to pay for martial debts and expenses directly.

III. Mixed

A business interest may be classified as a mixed asset - or an asset that is martial in part and separate in part - for a couple of reasons:

1. The business interest was acquired both during and outside of marriage. For an example of such a scenario, take a look at the case Pittman v. Pittman, 791 So. 2d 857, 865 (Miss. Ct. App. 2001), in which a spouse worked without pay for a year in a business to earn a 5% interest in the business. Only a portion of that time would be classified as marital, and so only a portion of the 5% interest would be classified as a marital asset.

2. The value of a separate property business appreciates during the marriage. A business that was owned prior to marriage as separate may be classified as mixed if the business appreciates in value during the marriage due to the owner spouse's efforts during the marriage. However, if the appreciation in value is due to forces other than the owner-spouse's efforts - such as inflation, or third-party efforts - the entire asset remains separate and the appreciation in value will not be classified as martial.

As you can see, owning a business or having an interest in a business can greatly complicate a divorce and property distribution. If you are a business owner or self-employed and facing a divorce, it is crucial that you speak with a divorce and family law attorney. Having a business interest appropriately valuated and allocated can drastically alter the balance of power in negotiations and impact any proposed property settlement agreement.

Jonathan T. Day, Esq. is a Divorce & Family Law attorney serving the Jackson, MS metro-area. You can reach him at (601)-707-8953 or jtd@jonathantday.com.

Intro to Division of Property in Divorce

The most important thing to know about property division in divorce is that determinations will be made on a case by case basis. There are factors that the court will consider that are the same for all cases, but how those factors will be weighed and considered by the court will vary drastically from one case to the next depending on the particular facts and circumstances of each individual matter.

There are, however, a few things to keep in mind when it comes to the division of property in Mississippi:

• The property to be divided incident to divorce is "marital property." Marital property has been defined as "any and all property acquired or accumulated during the course of the marriage."
• Generally speaking, inherited property and gifted property are considered separate property or "non-marital" property for purposes of the division of marital assets, and are therefore usually not subject to division - so long as the separate property hasn't commingled with marital property. Although if after equitable distribution one party still has unmet financial needs the court may consider alimony based on the value of non-marital assets to make up the difference.
• There is a clear presumption in Mississippi that the contributions of each spouse whether economic, domestic or otherwise are of equal value. This means that if one spouse works for a living while the other stays home with the children they stand equal for purposes of property division.
• Whose name the title to marital property is in should generally not be a concern. Who "has title" is not necessarily the deciding factor in property division.
• Assets produced solely by the earnings of one spouse (such as pension plans) may still be subject to division.
• Equitable distribution does not mean a 50/50 split of all marital assets.

This list merely represents the tip of the iceberg. Outcomes of property divisions are like snowflakes, no two are exactly the same. Each case will be determined on its own merits. If you are facing a divorce it is in your best interest to contact a divorce attorney.