How Courts Split Business Assets in Divorce Settlements

Divorce can feel overwhelming, especially if you and your spouse share businesses. Each day, we hear from people who worry that years of effort and investment might fall by the wayside in a property division battle. 

At Jackman Law Firm, we have offered guidance in family law matters since 2014, and we understand how challenging it can be to sort out business assets. Our aim today is to address some common concerns about dividing business interests in Washington divorces.

Washington State’s Community Property Law

In Washington, nearly everything you acquire during marriage is shared property. Even if one spouse earned more income, a court may still view marital gains as equally owned by both. This “community property” rule stems from RCW 26.16.030, stating that property or debt from your marriage belongs to both spouses in equal measure.

By contrast, any property or money you had prior to your union generally remains yours. Gifts or inheritances received entirely in your name are also considered separate property. That means these items are not subject to division if you divorce. Yet it is important to confirm you have not mingled the separate property with marital accounts or used marital funds for upkeep, as that could change how a court regards it.

Courts often focus on community property when they determine who gets what at the end of a marriage. Even so, it can be complicated to figure out whether a business is truly separate or shared. This brings us to the next section: pinpointing whether your enterprise is part of the marital estate.

Is Your Business a Marital Asset? Factors Considered

Also known as community property, marital property refers to any business launched or maintained with shared funds usually belonging to both spouses, at least to some degree. Yet, not all businesses fit neatly into that category. A key question is whether the venture started during the marriage or drew from marital assets to cover expenses. If so, Washington courts will likely see it as joint property.

Another factor is whether one or both spouses provided labor or finances to keep the business afloat. When both partners contribute, the court may consider that enterprise a shared asset, even if it began before marriage. Also, if a spouse runs the daily side of the business or helps in less visible ways, that involvement can shape how a judge divides the property.

Business Start Date

A new company founded while you are married usually becomes marital property. The court will likely include it within the pool of assets to be divided. However, if you formed that enterprise before tying the knot, the court might view only the increased value during marriage as subject to division. Documenting the business’s value at the marriage date can be crucial in these cases.

Contribution of Marital Assets

Sometimes, spouses tap shared savings or earnings to purchase equipment, pay employee wages, or cover overhead. In those instances, a court may conclude that at least a part of the company is owned by both parties, regardless of whose name stands on the business license.

Spousal Involvement

One spouse might devote weekends or nights to help with the enterprise, even in small ways like bookkeeping or supply runs. This evidence can support the argument that both spouses have a stake in the venture. Courts pay attention to how direct or indirect contributions shape the business’s prosperity.

Business Valuation: Determining Fair Market Value

Pinpointing a fair value is often pivotal in divorce proceedings. If the business is partially marital property, Washington courts need a thorough appraisal to see how much it is worth. That figure then helps guide negotiations and decisions over dividing assets.

Valuations typically consider revenue streams, assets, market considerations, and potential debts. Some ventures have complicated finances, and you may need an impartial appraiser to evaluate these factors. Although each method has its strengths, the goal is the same: arrive at a credible estimate that can stand up to scrutiny.

Common Valuation Methods

Once a court or both parties settle on a valuation, the next step is figuring out how each spouse will receive that share of the final number. One might keep the company, with the other receiving an equalizing payment, or they may negotiate different outcomes, such as a buyout or a structured plan.

Dividing Business Interests: Options for Spouses

Obtaining an accurate valuation is only one part of the puzzle. You then need a plan to split those interests fairly, allowing both parties to proceed without undue strain. Washington courts typically favor arrangements that do not wreck the viability of the company.

Sometimes, only one spouse wants or has the skill to carry on the enterprise. Other times, it might be best to sell the operation and split the proceeds. We encourage you to assess these choices carefully since the approach can affect everyone’s future.

Buyout

One option is to buy your spouse’s share, paying them a lump sum or through an installment plan. This arrangement can enable you to continue running the business while your spouse steps away. The terms vary, so be sure to discuss them thoroughly.

Sale of the Business

Some couples prefer to put the business on the market and divide the resulting funds. This path may be more straightforward if neither spouse remains keen on remaining tied to daily affairs. Once sold, you part ways with the operation and finalize the asset split.

Co-ownership

Another route is to remain co-owners even after the divorce. While it can be daunting, this plan sometimes works if both spouses already share daily tasks or a common vision. Clarity and trust remain crucial here, so having a good operating agreement in place is vital.

Trading Other Assets

In some divorces, a spouse trades away other assets like the family home to offset business equity. You might keep the company, while your spouse assumes ownership of a larger share of other property. This can be efficient if both parties wish to protect the most valued assets.

Protecting Your Business: Prenuptial and Postnuptial Agreements

No one likes to think about worst-case scenarios before or after marriage. Still, a prenuptial or postnuptial agreement can help safeguard your business interests if divorce arises. These documents define which items each spouse controls and who gets what in case of a future separation.

Couples may insert clauses into a shareholder agreement, naming restrictions on how divorces could affect the business. Others choose to pay themselves a fair salary so marital funds are not in flux, and they keep personal bills separate from the enterprise. Any of these actions help clarify the boundary between personal and shared property in the eyes of a court.

If you do not have an agreement in place, that is still okay. You can take actions to demonstrate that you have handled your venture consistently, and keep detailed records to show which funds were separate. Even an informal contract to track each spouse’s contributions might help clarify any stiff debates later on.

Facing a Divorce Involving Business Assets? Contact Jackman Law Firm Today

We focus our practice on family law and aim to help you find a fair resolution. Safeguarding your interests is only a call away. Feel free to dial 206-558-5555 or reach us through our Contact Us page to arrange a consultation. We will stand by you as you seek the best path forward for your finances and your future.