When a Pennsylvania married couple divorces, they must divide their marital property between them according to state law. Pennsylvania requires that this property division is fair under the circumstances, and not necessarily that it is equal.
So, when dividing relatively simple assets like savings accounts, it’s easy enough for the spouses to withdraw the money and distribute it between them according to the terms of their divorce settlement. But many types of assets aren’t so easy to split.
If one or both of the spouses own a small business, dividing this asset can be particularly challenging.
Is the business part of the marital property?
The first question to ask is whether the business counts as part of the marital property, or whether it is considered separate property.
The property division process begins with both spouses listing all their assets and debts. They can then determine what is separate property and what is marital property. Only marital property must be divided.
Generally, property that either spouse owned before the marriage is considered separate and anything they acquired during the marriage is considered marital property. So, if the spouses acquired or started the business during the marriage, it will most likely be considered as marital property.
If one spouse owned the business before the marriage, it may, in some cases, be considered separate property. However, the lines between separate and marital property can become blurry, especially in long marriages.
For instance, if one spouse owned a business before the marriage, but the other spouse contributed to the business during the marriage through labor, investment or otherwise, then they may have acquired a property interest. They may not be entitled to 50% of its value, but they could have a right to some percentage of it.
Three options
If the spouses conclude that the business is part of the marital property, then they have three basic options for dividing it:
- Sell the business and split the proceeds: In some ways this is the most straightforward option, but one or both spouses may be reluctant to sell.
- Continue as co-owners: This option has the advantage of keeping the business in the family, so to speak, but it can add a lot of complexity to running the business. And, of course, many people do not want to stay business partners with an ex.
- One spouse buys out the other’s share: This is the most common option, but comes with complications of its own.
Valuation and taxes
Before anyone can buy out a co-owner’s share, they must agree on a price. To do this fairly, the spouses need a valuation of the business. This means hiring professionals who assess the business and, using various methods, estimate its fair market value.
Once the parties have that value as a guide, they can negotiate a price for one party’s share. The spouse who wants to keep the business can then pay the other spouse in a lump sum, or through another system.
Here’s one piece of good news: the transfer of a business interest is generally tax-free so long as it is “incident to divorce.” To quality, the transfer must occur within a year, or possibly up to six years after the end of the marriage.