One question that often arises in matrimonial proceedings is how do the courts address a spouse’s interest in a family business?
In the absence of a premarital agreement (always recommended if there is a family business), the parties, by their lawyers, have to determine what interest, if any, a spouse may have in the family business that is owned in whole or in part by his/her spouse and how to distribute that asset.
By “family business” we are referring to an entity that was not begun by one spouse during the marriage. In the case where the divorcing spouse is the founder of the enterprise, the enterprise is a marital asset with normal valuation and distribution issues.
Many small or medium-size businesses are begun by a parent, grandparent or another member of an older generation and employ, and are eventually owned (in whole or in part), by a member of a subsequent generation now involved in a divorce proceeding.
The first question that must be addressed is the form of the business. Is it a sole proprietorship, a partnership or a corporation of some type? The form of the entity will impact the discovery process as each has unique reporting and accounting requirements and varying tax structures. Discovery demands should be tailored to the form used.
The next question is the percentage of ownership. In the case where the divorcing spouse owns 100 percent of the business, no further questions need be asked.
More complicated is the situation where after one or more generational shifts, the ownership is spread amongst the descendants of the founder or founders. The percentage of ownership can have a significant impact upon the value of the spouse’s interest. Majority ownership, with control, is almost always move valuable that a minority interest which usually carries with it a discount.
A controlling interest is more likely to have a value in direct proportion to the value of the entire enterprise than would be a minority holding. The partnership returns, K-1s or the stock transfer ledger should be examined carefully.