Little Shop of Horrors: Dealing With Your Business In Divorce

By Jennifer M. Paine

Attorney, Cordell & Cordell, P.C., Detroit office

Note: This is Part 1 of a three-part series on dealing with your business in divorce. Click here to read Part 2 and click here to read Part 3.

If you are a small business owner, dealing with your business in your divorce could send you spinning into a scene from Little Shop of Horrors.

Except, instead of a carnivorous plant reeking havoc on your business, your attorney and your soon-to-be-ex could be crying “Feed Me!” Cash, that is, and lots of it.

The family business is often the largest marital asset. Worse, family business owners usually pour their savings into their businesses and secure business loans against their own property or guarantee.

When divorce looms, one spouse develops SBLS (Sudden Business Losses Syndrome) and the other spouse develops SITS (Sudden Ivana Trump Syndrome). That is, one spouse thinks the business is worth nothing and the other a whole lot of something.

They reach a stand-off and fight back-and-forth over whose value is “right” until one spouse caves in or their judge picks a value at, what seems to be, random. No one wins, except the attorneys and their pocketbooks.

How can you avoid this scene and deal with your business effectively? Here are some suggestions.

Decide What It Is

First, decide what it is.

The family business is often not only the largest asset in the marriage, it is the family’s main source of income. The family may have loaned the business certain assets (e.g., a vehicle) expecting to receive a return on the investment, just as one would expect with any property investment. But the business may also generate the family’s income stream, such as through a salary in addition to repayment for loans.

Your decision will drive the division method in your divorce. If you call the business “property,” as you might for a business that makes money with tangible assets, like an apartment complex, then it is subject to the “equitable” or “equal” division rules for property division.

If you call it “income,”  as you might for a business that makes money with intangible assets, like a lawyer’s practice, then it is subject to the alimony award rules.

Merely semantics this is not. Most states award each spouse one-half of the marital property. However, not all states award each spouse one-half of the other’s income as alimony.

Therefore, when a business is both property and income, like a retro ice cream parlor with top-notch appliances and cash to pay salaries to boot, it is important to segregate the property from the income when dividing it to avoid a double dip.

That is, without careful segregation, you could divide the entire business as property and then award the non-taking spouse alimony based on the taking spouse’s  income from the already-divided business.  See, e.g., McCallister v McCallister, 517 NW2d 268 (Mich Ct App 1994).

Note: This is Part 1 of a three-part series on dealing with your business in divorce. Click here to read Part 2 and click here to read Part 3.

 

Jennifer M. Paine is an Associate Attorney in the Detroit, Michigan office of Cordell & Cordell P.C. She is licensed to practice in Michigan, and has been admitted pro hac vice in Illinois, Ohio, and the United States Court of Federal Claims. Ms. Paine received her BA in English and Mathematics from Albion College and graduated Summa Cum Laude. She received her Juris Doctorate from MSU College of Law and graduated Summa Cum Laude.

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