Tennessee divorce for business owners presents unique challenges, blending personal and financial concerns that can impact long-term business stability and wealth preservation. When one or both spouses own a business, divorce requires careful planning to safeguard business assets, maintain operational continuity, and ensure fair division of marital property while protecting business interests from unnecessary disruption.
Tennessee's Equitable Distribution and Business Assets
Tennessee is an equitable distribution state, meaning marital assets, including business interests, are divided fairly but not necessarily equally between spouses during divorce.
Marital Property vs. Separate Property Classification
A critical factor in protecting your Tennessee business during divorce is determining which parts of the company are marital versus separate property. Everything you acquire while you are married becomes subject to division when you get divorced. Even if you owned property or a business before the marriage, you still will probably have to divide the value by which the asset increased during your marriage. If your business took off while you were married and started doing well, you may owe your spouse as much as half of that increased value when you divorce. However, if you have a prenuptial or postnuptial agreement, these concerns may not apply to you.
When Business Is Considered Marital Property
If you started or acquired your business during the marriage, it may be a marital asset subject to division. When an LLC or other business entity was established during your marriage, it is considered shared marital property even if it isn't under your spouse's name. Marital property is subject to equitable division in Tennessee, which means the business's value will be divided fairly and equitably—not necessarily equally—based on factors including each spouse's contribution to the business, the length of the marriage, and the economic circumstances of each spouse.
Separate Property Becoming Partially Marital
Even if your family business or your spouse's business existed before you got married, it is considered separate property belonging solely to the spouse it belonged to before marriage. However, while the LLC may be considered separate property, if the value of the company increased during the marriage, that increase in value is considered marital property. It is important to know that even in cases where one spouse founded a business before marriage, the business could still be considered partially marital if the other spouse contributed labor, resources, or strategic guidance in operating the business.
Business Valuation in Tennessee Divorce
Determining the business's value is one of the most important steps in dividing a business during divorce, and this process often involves professional business valuation experts.
How Businesses Are Valued
When a business is part of a divorce, one of the first steps is to determine its value. A Certified Public Accountant or professional business valuation expert is typically hired to assess the value of the business. This professional will request various financial documents, such as tax returns, bank records, and other relevant documents. The speed and accuracy of the valuation will depend on how quickly these documents are provided. Common valuation methods include the income approach, calculating the business's value based on its earning potential, the market approach, comparing the business to similar companies recently sold, and the asset-based approach, focusing on the business's tangible and intangible assets minus liabilities.
Factors Affecting Business Value
The valuation expert will consider factors including business income, assets and liabilities, industry-specific considerations, market conditions, and growth potential. The valuation of your business is essential as it helps determine the financial value that may be owed to your spouse. However, it's important to note that attempting to manipulate or hide financial information during the business valuation process is not only unethical but can also backfire in court. If your spouse hires a professional who detects any deceit, it could lead to serious legal consequences, including loss of credibility and adverse judgments.
Challenges and Disputes in Valuation
Valuing a business during divorce can be contentious. Your spouse might suddenly claim that the business is struggling and not making any money, or is making less than you thought. Your spouse might even use deceptive tactics to undervalue the business or personal income, such as using business money to pay for personal expenses, thereby undermining the business's bottom line. Your spouse can also refuse to or delay handing over important documentation to show the value of the business. Often, each party hires an appraiser, and then an amount is agreed to somewhere in the middle of the two appraisals.
Division of Business Ownership in Tennessee Divorce
Once your family business is classified as marital or separate property and the court has received a fair market valuation, the division of assets process begins with several possible approaches.
Buyout of Spouse's Interest
One spouse may buy out the other's interest, allowing the buying spouse to retain full business ownership. This option allows the business to remain intact and under single ownership. In an LLC, all of the members of the company have financial rights to the assets of a business, including profits and losses in proportion to their ownership interests as specified by the business's operating agreement. To keep your family business fully in the family, you may buy out your spouse's ownership interest in the LLC either through a lump sum or structured payments. This is a common method of splitting a business in divorce if you were significantly more involved in the business than your spouse, compensating them for the value they created while keeping your family business wholly on your side of the family.
Offsetting with Other Marital Assets
One other agreement you and your spouse might come to could be for you to retain business ownership in full in exchange for giving up other marital assets of equivalent value. For example, you might agree to keep the family business in full in exchange for giving your spouse the entirety of a shared real estate property or retirement account. Once the equity is determined, the next step is determining how to provide the non-business owner spouse with his or her equity, often done either through a cash settlement, payments over time, or by providing that spouse with other marital assets to make up the difference.
Co-Ownership Post-Divorce
Sometimes spouses agree to continue operating the business together after divorce. However, co-ownership can be complicated and requires clear communication and mutual trust. One rare option to reconcile divorce and business ownership is to decide on co-ownership, where both spouses continue to jointly own your LLC. This option is not commonly seen, as it can lead to conflict or operational challenges if there is a lot of contention between you and your spouse. However, if your divorce is amicable, it could work out.
Selling the Business
If neither spouse wants to continue owning the business, selling it and dividing the proceeds may be the best solution. This option allows both parties to start fresh financially. A good option can be to sell the business and split the equity. If that cannot be agreed to or is not practical because of the type of business, the next option is to try to agree to one spouse continuing to run the business while the other gets a buyout of the equity.
How Business Structure Affects Divorce Outcomes
The type of business structure and whether there are co-owners or an operating/ownership agreement significantly impact how business interests are handled in divorce.
Sole Proprietorships
Sole proprietorships are fully exposed to division as they're tied directly to the owner. In cases where business owners have partners, the business's ownership structure plays a role in how it is handled during the divorce process. If you are part of a partnership, understanding what happens to your business ownership during a divorce is essential.
Partnerships and LLCs
If you own a percentage of a business with one or more partners, that share will be valued, and your spouse may be entitled to a portion of that value. However, your spouse does not automatically gain ownership in the business. For example, if you own 50% of the business with other partners, your spouse is not automatically entitled to become a co-owner. What they are entitled to is a portion of your share's value. This is where a solid business agreement, such as an LLC's operating agreement or shareholder agreement, becomes crucial. Clear agreements with your business partners outlining what happens in the event of divorce can protect your interests.
Corporations
Shares in a corporation may be marital property, but corporate governance documents can restrict transfers. Many business agreements include provisions on divorce or the sale of shares, so having clarity about what your agreement says can help avoid unnecessary conflict. It is essential to communicate with your business partners about your divorce and review your partnership agreement to avoid complications.
Protecting Your Business with Prenuptial and Postnuptial Agreements
Prenuptial or postnuptial agreements can be valuable tools to protect your business from being divided in divorce.
Prenuptial Agreements for Business Protection
A prenuptial agreement can be a valuable tool to protect your business from being divided in divorce. If you own a business before marriage, a prenup can specify that the business remains solely yours in the event of divorce. A prenuptial agreement can also specify that any business started after the marriage will be considered separate property and will not be subject to division in the event of divorce. This agreement must be carefully constructed to ensure it is enforceable in court. It's important to ensure that both parties have independent legal counsel when drafting a prenuptial or postnuptial agreement.
Postnuptial Agreements
If you did not have a prenuptial agreement, you can still enter into a postnuptial agreement. This agreement can protect business assets by stating that the business will remain with the spouse who owns it. In cases where divorce is already underway, a postnuptial agreement may be used to clarify ownership of the business and prevent it from being divided during the divorce process. If you have a prenuptial or postnuptial agreement that addresses the division of your business in the event of divorce, these agreements will play a crucial role in the outcome. A well-drafted agreement can provide clarity and protection, potentially saving you from lengthy and contentious litigation.
Enforceability Requirements
In Tennessee, these agreements are generally enforceable if they are entered into voluntarily by both parties, based on full financial disclosure, and not unconscionable or grossly unfair. A well-drafted agreement can classify the business as separate property, limit your spouse's claim to its appreciation, or outline a predetermined division of assets.
Additional Business Protection Strategies
Beyond prenuptial agreements, several other legal strategies help protect your business during divorce.
Trusts and Business Entities
To prevent your family business from being included in marital assets during a divorce, you can place your business in an irrevocable trust that owns the business in your and your family members' stead. As a result, you can shield the business from marital asset division in divorce. You might also set up a Family Limited Partnership or Family Limited Liability Company, which allows your family to maintain control over and financial rights to the assets of a business while limiting the ability of non-family members, such as a divorcing spouse, to claim ownership or control.
Operating Agreement Provisions
When you start an LLC, you have significant leverage in drafting its operating agreement to determine how to split a business in divorce or to avoid splitting the business altogether. Your LLC's operating agreement can include buyout clauses, restrictions on transferring ownership interests, or predetermined valuation methods to avoid disputes over the value of your marital assets. LLCs, partnerships, and buy/sell agreements allow you to include provisions that protect you and other business owners if divorce occurs. Requiring unmarried shareholders to provide the business with a prenup or not permitting the transfer of shares without 100 percent approval from other business partners are ways to protect each business owner.
Keeping Business and Personal Finances Separate
Keeping personal and business finances separate is a fundamental step. To maintain the business's status as separate property, avoid commingling it with marital assets. Practical steps include using separate bank accounts, paying business expenses from accounts funded by business revenue, not marital funds, documenting ownership clearly, and limiting spouse involvement in business operations. If your spouse works in the business, their contributions could be seen as marital, increasing their claim. Consider formalizing their role with a salary to clarify their involvement.
Business Debt Considerations in Divorce
Business debt can complicate the division of assets in divorce proceedings, requiring careful analysis and planning.
How Business Debt Is Treated
Business debt associated with the business will be considered during the divorce settlement, whether the business is a sole proprietorship or an LLC. If the business is incorporated or has a complex structure, a CPA will include business debts when valuing the company. For example, if a business is valued at $100,000 but also has significant debts, the value of the business could be reduced. If one spouse owns the business, they may need to buy out the other spouse's share of the business or compensate them in some other way using assets or cash.
Separating Business and Personal Debt
For sole proprietorships, business debt might be associated with the individual's personal finances. In this case, it is important to clarify which debts belong to the business and which are personal, as the division of debts will impact the final settlement. The business debt will be factored into the settlement and could impact the overall financial outcome.
Impact on Business Operations During Divorce
Divorce proceedings can significantly affect business performance and operations, requiring proactive management.
Operational Challenges
During the divorce process, you and your spouse might find yourself in dispute over the most accurate ways to determine the value of your business or who should retain control of the business post-divorce, or about the division of business debts and liabilities. As a result of these sorts of contentious, time-consuming, and emotionally draining issues, your business's overall performance can suffer. Important business decisions can end up deadlocked by a prolonged dispute, leading to the business losing its value or taking a hit to its reputation.
Maintaining Business Continuity
Strategic legal measures are pivotal to reducing the impact on your business. Experienced divorce attorneys familiar with Tennessee business law can offer tailored strategies such as negotiating settlements that prioritize business continuity or restructuring ownership to suit post-divorce circumstances. The business can continue thriving without unnecessary disruptions by carefully planning these adjustments.
Mediation and Collaborative Divorce for Business Owners
Alternative dispute resolution methods often provide better outcomes for divorcing business owners than traditional litigation.
Benefits of Mediation
Mediation can be especially beneficial in cases involving a business, as it allows for more creative and flexible solutions. During mediation, your attorney can help ensure that your business interests are represented, aiming for an outcome that keeps the business intact and minimizes financial damage. Litigation can be costly and unpredictable, especially when a business is at stake. Consider mediation or collaborative divorce to resolve disputes amicably.
Collaborative Divorce Process
In mediation, a neutral mediator facilitates discussion, helping you reach a mutually acceptable agreement. Collaborative divorce involves each spouse hiring a divorce attorney trained in collaborative law to settle out of court. Both approaches can save time, reduce costs, and give you more control over the outcome. Negotiating settlements may involve creative solutions like buyouts or installment payments to balance the division of assets without disrupting business operations.
Working with the Right Legal Team
Protecting your business interests during divorce requires specialized legal counsel with experience in both family law and business law.
Importance of Specialized Attorneys
Having the right attorney can protect your business, fight complex claims, and safeguard both your personal and professional interests. Working with an experienced attorney who understands both family law and business law is crucial for ensuring that your rights and interests are protected. It is crucial to contact a divorce attorney with experience in business matters as soon as possible to protect your rights.
Professional Team Requirements
Your legal team should include a divorce attorney experienced in Tennessee family law who can advocate for your interests and negotiate favorable terms, a business appraiser to confirm accurate and fair valuation, a financial advisor to help plan for tax consequences, buyouts, or asset division, and possibly a forensic accountant to investigate allegations of hidden assets or income if necessary. Choose professionals with experience in high-asset divorces involving businesses, as they'll know the nuances of Tennessee law and local court practices.
Moving Forward with Tennessee Divorce for Business Owners
The intersection of divorce and business ownership presents unique challenges, including business valuation disputes, operational disruptions, partner concerns, and complex property division. However, with experienced legal counsel familiar with both family law and business law, you can navigate these challenges while protecting what you've built.
From negotiating buyouts to restructuring ownership, from utilizing mediation to drafting comprehensive settlement agreements, multiple pathways exist to preserve your business interests while achieving fair divorce outcomes. Taking proactive steps early, maintaining clear financial boundaries, and working with qualified professionals ensures your business survives divorce intact, allowing you to continue building wealth and success in your post-divorce future.