Common Issues In Dividing a Family Business

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Common Issues In Dividing a Family Business

Often, the largest asset in a case where one spouse owns a business is the business itself in divorce, and often the biggest assets of that business are not liquid. Marital property and debt is to be divided in accordance with the law in your particular state. However, in a general sense, in a dissolution of marriage action, assets and debts have to be divided in a just manner or as set forth by the laws in your state. In order to achieve a just division, it is vital to have a business properly valuated to achieve that end. Common issues are then:

Valuation disputes: The standards are often governed by local rules. Typically, valuation is considered to be Fair Market Value (“FMV”), but even how FMV is calculated or what can be considered in FMV varies by jurisdiction.

Division of the business: Will business be able to continue operating if forced to liquidate assets?

Tax ramifications: Section. 1041 of the Internal Revenue Code states: “no gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)-(1) a spouse, or (2) a former spouse, but only if the transfer is incident to the divorce.” According to Sec. 1041(c), a transfer is incident to the divorce if it occurs within one year after the divorce or “is related to the cessation of the marriage.”

A practicing divorce attorney will typically confront several typical interests in closely held corporations. These interests can be: (1) stock in the corporation; (2) membership in an LLC; (3) a partnership stake in a partnership; or (4) an ownership interest in a closely held family business.

Having an attorney who is familiar with representing a business owner or the spouse of the business interest is vital to ensure that they have at least a basic ability to read business statements. Here are a few basic starting points. A “C” Corporation must file a separate tax return. Income earned by corporation that does not flow through to an individual’s return, except to the extent that a spouse is paid wages or compensation that will be on the spouse’s W-2 or 1099 forms. On the other hand, “S” Corporations, LLCs, and Partnerships must file informational tax returns. There, income earned from these entities flows directly to the taxpayer and will be reflected in the individual’s tax return. Income from a single-member LLC should almost always be reflected in a Schedule C of the individual’s tax return. For a closely held family business, some basic documents are: (1) Corporate or Partnership Tax Returns; (2) Periodic Profit and Loss Statements; (3) Balance Sheets for the Business Entity; and (4) Inventory Reports, Accounts Receivable, Accounts Payable, Buy-Sell Agreements.

Keywords: Business Evaluations, Divorce, Separation, Closely Corporation


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