Protecting a Small Business in an Arizona Divorce

October 26, 2012

Divorce is a difficult thing for most people to endure and the pain of divorce can increase exponentially for those small-business owners if they end up losing part of their business in a divorce property settlement. Arizona is a "community property" state, which means that the court splits a couple's marital assets evenly in the event of a divorce. Arizona business owners can take steps to prevent the court from viewing their businesses as marital property, and also to ensure that the court treats the businesses fairly in an asset division in the event that the business is marital property.

Agreements Before Marriage

As unromantic as it may strike some, small business owners should enter into prenuptial agreements with their future spouses prior to marriage. If spouses agree to property distribution terms before they marry, the agreement can override the state's default property distribution laws. However, such agreements need to be carefully drafted so they meet the requirements for valid prenuptial agreements established by state law. In a prenuptial agreement, the spouses can agree that the business will go to the spouse who runs it. The other spouse may negotiate for other assets to make up for ceding rights to the business.

Agreements After Marriage

Business owners who did not enter into prenuptial agreements can make postnuptial agreements to try to protect their businesses. These agreements accomplish the same thing as prenuptial agreements, delineating which spouse gets which property. However, postnuptial agreements are challenged more frequently than prenuptial agreements and the court tends to uphold them less often.

Business Owner Agreements

If a spouse owns a business with other partners, the owners should create a buy-sell agreement for all of the partners to minimize the likelihood that the business will be involved in a divorce property settlement. Such agreements guarantee that the other business owners have priority purchasing rights to any shares in the business from other owners in order to maintain control of the business. The business can also require unmarried partners or owners to enter into prenuptial agreements as a condition of business ownership.

Running the Business After Marriage

The way that business owners run their businesses can impact how much of the business the court views as marital property. Even if a spouse comes into a marriage with a business, part of the business could still be marital property because all income that a spouse earns during a marriage is marital property.

Business owners should pay themselves a regular salary, rather than re-investing all of the business' profits back into the business. If a spouse saw some of the business' profits as income for the family during the marriage, the spouse has less of a claim to the actual business itself. Business owners should also not have their spouses work for them in the business. A spouse who contributed labor to make the business successful will have rights to a portion of the business because it is marital property.

Valuing the Business

If the business is marital property, it is important for business owners to have a fair business valuation in the event of divorce. Having an independent third party value the business ensures that neither spouse has to rely on the other for determining what the business is worth. If each spouse has a professional valuation done, the spouses and the court will have a clear idea of the business' value and the parties can negotiate a property settlement accordingly.

Dividing property when a business is involved can be complex. People who have small businesses in their families and are going through divorce should seek the assistance of a seasoned divorce attorney who can help ensure a just division of assets.

Article provided by Thompson Law Firm
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