In this article, you can discover…
- How jointly owned businesses are divided in a New York divorce.
- The best way to navigate co-owning a business after a divorce.
- Whether one spouse is allowed to buy out the other.
How Is A Jointly Owned Business Divided In New York Divorces?
Dividing a jointly owned business in a divorce can be incredibly complex, but the general process in New York follows some clear principles, similar to the division of a jointly owned home. If both you and your spouse’s names are on the business ownership documents, the business is typically considered a marital asset and subject to equitable distribution. Here’s a general breakdown of the process:
Valuing The Business
The first step is determining the value of the business. There are a couple of ways this can be done:
Simple Valuation Method
This involves calculating the net worth of the business by subtracting total debts from total assets. The resulting equity value can then be divided between you and the other party. Often, one party keeps the business while the other agrees to transfer ownership and receives a buyout reflecting their share. This method may work if the business does not generate a lot of income – it is not the recommended method if the business generates hundreds of thousands or millions in revenue.
Forensic Appraisal
In more complicated scenarios, or when you and your spouse cannot agree on a value, a forensic accountant may be brought in to perform a formal business appraisal. This can happen whether the divorce is contested or uncontested. Both of you can agree on an appraiser through your attorneys. Once the valuation is completed, decisions can be made about either selling the business or one party buying out the other’s share.
When Ownership Is Disputed
Sometimes, both of your names are on all the documents, but one person, typically the one who ran the business, may have contributed far more. For example, a spouse may have added the other’s name for tax purposes, even though they didn’t meaningfully participate in the operation or growth of the business.
In these cases, equitable distribution does not necessarily mean a 50/50 split. Also, the Judge may award a smaller share, perhaps 10% to 40%, to the less involved spouse, depending on their direct or indirect contributions to the business’s success. This is somewhat common in uncontested divorces, where you and your spouse negotiate terms outside of court and avoid a judge making the final decision.
Finalizing The Division
Once the value is agreed upon, whether informally or through a forensic accountant, the final step is deciding how to divide it. One party may retain full ownership, compensating the other with a lump sum or structured buyout. Alternatively, the business may be sold, and the proceeds divided based on the agreed-upon percentage. The usually method, however, is to determine the lump sum buyout – and then have that sum be part of a “distributive award’ to the other party of a credit against other assets.
What If Only One Spouse Started Or Runs A Business?
In New York divorces, it doesn’t matter as much who started or actively runs a business: what matters is when the business was started and how it’s classified under the law. Even if only one spouse is involved day-to-day, the business will still be considered marital property (so long as it was started during the marriage) and thus subject to equitable distribution.
To be clear, if the business was started during the marriage, it is generally considered marital property, regardless of whose name is on the ownership documents. Even if only one spouse’s name is on the business, the business may still be divided. New York law does not rely on title or “named ownership” to determine whether something is a marital asset. That said, if one handles the day-to-day operations and the other spouse makes no direct efforts towards the business, this will impact the percentages/he receives out of the value of the business.
If one spouse added the other’s name to the business, whether intentionally or not, it becomes a jointly owned asset. In this case, the business is treated as jointly held, and the more involved spouse may need to buy out the other’s share as part of the asset division.
One divorce we handled involved a wife who ran a successful internet business. She created content on social media platforms by reviewing products from a high-end company. Her short-form videos gained traction and were monetized, eventually earning her significant annual income. Although the husband had no involvement in the business, it was started during the marriage, making it marital property. They went on to have it valued by a professional appraiser, as would be done for any business. The end result was that it was divided accordingly, with the husband receiving a share of the appraised value.
So whether you’re running a tech startup, a consulting practice, or even a monetized social media account, if it was started during the marriage, it most likely counts as a divisible asset under New York law.
How Is Goodwill Or Reputation Factored Into A Business Division?
When it comes to valuing a business during a divorce, intangible elements like goodwill or professional reputation can play an important role. However, these aspects cannot simply be estimated by the attorneys involved or even by a Judge. The only reliable and accepted way to assign a monetary value to goodwill or reputation is through the use of a forensic accountant or business valuation expert.
This is especially relevant in professional practices such as medical offices, law firms, mental health practices, or accounting firms, where the business’s value is often closely tied to an individual’s reputation and client relationships. In such cases, a forensic accountant is brought in to conduct an in-depth evaluation and offer an expert opinion on the worth of the goodwill within that specific professional field.
Without this type of expert assessment, any attempt to quantify reputation or goodwill would be little more than speculation and would not hold up in court, particularly if the case is contested.
Can One Spouse Buy Out The Other’s Share In A Business?
Buyouts are one of the most common ways to handle a jointly owned business during a divorce. The process begins by establishing the value of the business. This can be done either by calculating the net worth by subtracting liabilities from assets or through a more formal approach, such as hiring a professional appraiser or forensic accountant. Once the value is established, the next step involves negotiating the percentage share that the non-retaining spouse will receive.
If only one spouse was actively involved in building or running the business, they typically receive a larger portion of the equity. It is generally considered unfair for the uninvolved spouse to walk away with 50% of the business’s value if they did not contribute to its growth. As a result, the buyout amount might reflect a smaller share, typically ranging between 10% and 30%, though it could be more or less depending on the specific circumstances.
The key point is that this percentage is negotiable, and both of you can agree on terms that you believe are fair.
Do Buyout Payments Need To Be Made Immediately?
A buyout doesn’t always mean that a lump sum of money needs to change hands immediately. If, for example, the agreed-upon value of the spouse’s share is $20,000, the spouse keeping the business is not necessarily required to write a $20,000 check on the spot. Instead, that amount can be offset through other parts of the divorce settlement. The value might be credited against the equity in a shared home, balanced with other marital assets, or factored into alimony or child support calculations. There is a wide range of options available to structure the buyout in a way that avoids cash flow problems.
In one recent case, for instance, a husband agreed to pay his wife $100,000 as part of a business buyout but was concerned because he didn’t have that kind of money on hand. The solution was simple: since they were selling the marital home, the wife received an extra $100,000 from the house proceeds. The end result was a clean and practical resolution without carrying out a large cash transaction.
What Are The Tax Consequences Of Transferring Business Interest?
Generally, transferring business interests (or indeed any other assets) between spouses during a divorce is not a taxable event under IRS regulations. However, the source of the funds used for the buyout could trigger tax implications, depending on the structure of the business (whether an LLC or S-Corp, for example) and whether business assets are being liquidated to fund the buyout.
Should My Spouse And I Form A Written Agreement If We Want To Continue Co-Owning The Business?
You and your spouse can co-own your business after your divorce finalizes. But if you plan to, it is essential to have a written agreement in place. While it may seem straightforward at the outset, the reality is that co-owning a business post-divorce introduces a range of potential complications. A detailed agreement ensures that both parties understand their rights, responsibilities, and how various scenarios will be handled over time.
One of the most important reasons to formalize your arrangement is to address future contingencies. For example, what happens if the business accrues substantial debt or experiences financial losses? Who is responsible for covering that debt, and in what proportion? These details should not be left vague, especially if the financial positions of each party change significantly over time. An agreement that splits liabilities 50/50 might seem fair now but could become deeply problematic if one spouse later earns far more than the other.
It’s also important to consider operational issues. Without clear expectations, you could find yourself tied to a business where your ex-spouse becomes uncooperative or disengaged. If one person ends up doing all the work while the other contributes little or nothing, conflict is all but inevitable. A well-crafted agreement should specify what happens in that scenario. Can one party force a buyout? Can either party trigger a sale? How will decisions about employees, contractors, or business expenses be made?
Because these matters involve more than just divorce law, it’s worth consulting a business or corporate attorney, too. They can help you draft a comprehensive business agreement that can either be created as a standalone contract or attached as a rider to your divorce settlement. It should address ownership percentages, profit sharing, dispute resolution procedures, and contingency plans for things like dissolution or sale.
What Happens To Business Debt During A Divorce?
In the context of divorce, business debt typically remains with the business. This means that if one spouse retains ownership of the business, they generally assume responsibility for its associated liabilities. However, the treatment of business debt is closely tied to the overall valuation of the business, which becomes a central component in divorce proceedings.
When assessing the value of a business, it is standard practice to factor in its debts. To ensure accuracy, it is essential to gather financial statements that substantiate the business’s obligations. A forensic accountant is often sought out to conduct a detailed review, distinguishing legitimate business debts from personal expenses that may have been improperly charged to the business.
In some cases, people misclassify personal expenditures as business-related to gain tax advantages or obscure their true financial picture. Common examples include charging personal meals, commuting costs, home internet, vacations, clothing, or even personal vehicles to the business account. This all too easily artificially inflates the business’s debt and distorts its valuation. Conducting a thorough financial review is essential to ensure a fair valuation of the business is realized and that the liabilities are equitably divided.
Still Have Questions? Ready To Get Started?
For more information on business division in uncontested divorces in New York, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling
(347) 797-1188 today.