5 Considerations in Divorce if You Have a Business in Colorado
Divorce is a challenging process, and it becomes even more complex when a business is involved. Business ownership adds a layer of intricacy to the division of assets and requires careful evaluation. In this article, we will explore the key considerations and steps to ensure a fair and equitable handling of business ownership during divorce.
A Business is an Asset
While the spouse who owns the business may feel a strong emotional connection to it, legally, a business is considered an asset. Consequently, it must be determined whether it is separate or community property, or a combination of both, along with a proper valuation. However, these determinations are seldom straightforward.
Identifying the Type of Business
In divorce cases involving a business, it is essential to understand the type of business in question:
- Community Business: A business started during the marriage.
- Separate Property Business: A business initiated before the marriage or during the marriage using separate property funds. Although it may have a community interest, it remains separate property.
- Tracing Separate Property: If one spouse establishes or acquires a business using separate funds, tracing is necessary to allocate separate property and community property interests. Failure to provide adequate tracing could result in the business investment being presumed entirely community property. Additionally, any increase in the business’s value due to community efforts is considered community property.
Challenges in Dividing a Business Practice
Dividing community property small businesses or professional practices can be exceptionally challenging during divorce proceedings for two main reasons:
- Indivisibility: Businesses heavily reliant on the skills, services, or reputation of the operating spouse cannot be easily divided between the spouses. Legal constraints may even prevent the sale or division of certain professional practices.
- Valuation Difficulty: Determining the value of a business is a complex and time-consuming process. It involves assessing fixed assets (if any), accounts receivable, liabilities, and in some cases, “goodwill.” The valuation can be approached through the asset, income, or market methods.
The Key to a Fair Division: Accurate Valuation
Valuation is critical for a fair division of property. There are three primary approaches to determine a business’s value:
- Asset Approach: This approach calculates value by subtracting liabilities from assets.
- Income Approach: It involves assessing the profit or income generated by the business.
- Market Approach: Value is determined by comparing the business to similar ones recently sold.
Given the intricacy of this process, it is advisable to engage a neutral evaluator or an independent forensic accountant experienced in family law matters to analyze the business for valuation purposes, especially in cases involving large and complex businesses.
Checklist for Requesting Business Documents from Your Spouse
To ensure a comprehensive evaluation of the business, it is crucial to gather essential documents from your spouse. Here’s a checklist of what to request:
- Records from the three years before the date of the business’s value, including:
- Federal and state income tax returns
- “QuickBooks” or other electronic data files, if available
- Year-end financial statements (prepared by a CPA, if possible)
- Records from the last year and the current year, including:
- Interim financial statements
- General ledgers
- Records as of a date closest to the business’s value date and the most recent fiscal year-end, including:
- Year-end detail and aging of accounts receivable
- Year-end detail and aging of accounts payable
- Year-end listing of all fixed assets at the detail level
- Permanent records, contracts, and agreements, such as:
- Life insurance policies for key employees or officers
- Lease agreements for all facilities occupied
- Articles of incorporation, entity bylaws or operating agreements, and shareholder agreements
- Any other relevant legal agreements
- Reports of any consultants or appraisers made within the past five years
- Listing of any transactions in company stock since inception
- Previous offers to purchase company assets or stock
- Any business plans, forecasts, projections, or budgets prepared in the five years before the business’s valuation date
In conclusion, navigating divorce when a business is involved requires a thoughtful and thorough approach. Understanding the type of business, its value, and utilizing professional expertise for accurate valuation are vital steps. By following the proper procedures and obtaining the necessary documentation, couples can ensure a fair and equitable handling of business ownership during a divorce.
1. Can a community business be divided between spouses during a divorce? In most cases, dividing a community business in kind is impractical, and selling it may not be permissible. The division becomes more challenging for businesses heavily reliant on the skills of the operating spouse.
2. How can I determine if my business is separate or community property? To determine whether a business is separate or community property, you must assess when the business was started and the source of funds used to establish or acquire it.
3. Should I hire an independent forensic accountant for business valuation during divorce? Engaging an independent forensic accountant, especially for complex businesses, is advisable to ensure an accurate and impartial evaluation.
4. What are the primary methods used for business valuation? The three primary methods for business valuation are the asset approach, income approach, and market approach.
5. How can I protect my business during a divorce? To protect your business during a divorce, it’s essential to maintain detailed financial records and seek legal counsel early in the process.