Question: My husband and I are the owners of a small, but profitable
small business. We've recently agreed to a divorce. How can we divide
the assets of our business in a fair manner?
Answer: Problems in the operation of a family-owned business tend to multiply with the introduction of a shareholder's divorce.
Question: My husband and I are the owners of a small, but profitable small business. We've recently agreed to a divorce. How can we divide the assets of our business in a fair manner?
Answer: Problems in the operation of a family-owned business tend to multiply with the introduction of a shareholder's divorce.Issues such as the direction of the business, the compensation and benefits paid to shareholders, the resolution of day-to-day managerial problems, etc. can destroy the business over time, leaving both parties in worse shape than they would have been had they initially come to terms on how to divide, sell, or otherwise dispose of their similarly owned and controlled business interests.
The following are some options in the event of a family business owner's divorce.
> Sell business to third party. This will have the same general tax consequences whether the sale was driven by a divorce or not. A forced sale is likely to result in a depressed sales price.
> Buyout of a spouse's interest or share. The major challenges with this option include getting the spouses to agree on the method of determining the valuation/sales price of the company, the method and timing of paying the sales price, and determining how the transaction will be characterized for tax purposes.
Fair market value is the price at which an independent buyer and independent seller would willingly agree to enter into a purchase transaction; however, as the buyer and seller in this situation are not independent third parties, and are in essence forced to transact with one another as co-owners, it is often difficult to arrive at an agreed upon fair market value for the transaction.
In such situations, a specialized appraiser, CPA, or CVA is generally hired for purposes of trying to determine fair market value. Separate appraisers are also sometimes engaged by both of the spouses for negotiation purposes or even to give testimony before a court when the divorcing spouses cannot reach a satisfactory valuation. After the price and payment terms have been agreed on, the spouses must address the tax consequences.
> Transfer/redemption of stock. Where the business is operated as a corporation, the regulations allow spouses to transfer assets in a tax-free manner; however, when the family company will be used to redeem stock, there will be a recognition event if there is either redemption or a constructive dividend.
Spouses can agree between themselves as to how the transaction will be taxed. For the agreement to be effective, it must be filed with the applicable tax return for the year that includes the stock redemption.
> Co-existence - continue ownership and operation of the business. Often the only thing divorcing spouses can agree on is that the family business should not be sold at the time of the divorce.
The option of continuing the family business, with powers and duties divided between the divorcing couple, usually should be considered as a long-term solution only where special circumstances are present. Among such circumstances:
(1) a profitable business that can sustain the monetary desires of both of the divorcing spouses;
(2) a desire or need by both spouses to continue their ownership;
(3) where neither spouse is able or willing to buy the interests of the other;
(4) children of the divorcing spouses are active in the business; and
(5) where both spouses are emotionally and mentally capable of co-existing as shareholders, officers, and directors of the company.
Spouses would enter into management agreements to delineate specific duties in the operation of the business and to identify those issues requiring the vote or approval of both spouses. The spouses also may want to prepare employment agreements to address benefits, termination, resignation, covenants not to compete, etc.
Additionally, all owners should enter into buy-sell agreements to specifically address the future transferability of business interests, and the purchase rights on death, among other issues.
> Split up the company. It may be possible to split a family-owned business between the divorcing couple.
The alternatives available to a divorcing couple include dividing the business assets and beginning or continuing separate business lines with separate ownership or dividing the business into different segments and continuing to own and operate separate divisions of the business enterprise.
From the Coloradoan.com.