Getting Divorced When You Own a Business With Someone Else

If you (or your spouse) own part of a business with someone outside the marriage and are going through a divorce, no doubt you’re asking, “What does this mean for the business?” It’s a common question for business owners, and their partners often have the same question.

First and foremost, your business partner’s individual stake doesn’t play a role in your divorce. Their interest is theirs, and it is excluded from any discussion about or allocation of property. So your partner can carry on with, well, business as usual.

What matters is the spouse’s interest in the company and the value attached to that interest. This is where the question of “how much is the business worth” comes into play. Maybe you own half of a company with a longtime business partner. Or perhaps you hold a minority interest in an LLC with several other members. Either way, the answer isn’t a simple multiplication problem. Valuing a business partnership in divorce involves several factors, and allocating a portion of the interest to the other spouse adds another layer.

Let’s look at why dividing a business owned with individuals outside the marriage differs from dividing a wholly owned business, how to value the business interest, and what happens to the interest in the asset-division part of a divorce.

Key Takeaways

• When a spouse owns a business interest with someone outside the marriage, only the spouse's interest may be marital property subject to division, not the entire business or the other partner's stake.
• Missouri divides marital property under RSMo 452.330, and a business partnership interest acquired or grown during the marriage is treated like any other asset under that framework, though its valuation is more complicated.
• Valuing a minority or non-controlling business interest often involves discounts for lack of control and lack of marketability, because an interest that can't be freely sold or used to control the business is typically worth less than a straight percentage of the company's total value.
• Income or distributions from the business can factor into child support and spousal maintenance calculations even after the ownership interest has been valued and divided.

Is a Spouse's Business Interest Marital Property in Missouri?

Before we dive into what can be considered marital property (and what likely isn’t), remind your business partner(s) to breathe a sigh of relief. They don’t stand to lose any portion of their interest during your divorce. The focus is on the spouse’s specific share of the business partnership in divorce.

In plain terms, judges focus on the divorcing spouse’s individual specific ownership interest to first determine if the business interest is marital property, and second, to determine the percentage or share the spouse holds.

Under the Revised Statutes of Missouri section 452.330, the law that addresses the disposition of property and debts during divorce, “all property acquired by either spouse” after the marriage and before a final divorce decree is “presumed to be marital property.” This is the general rule, and it applies even when an asset is held in an individual's name (such as an outside business interest). Still, the presumption of marital property can be overcome, and an asset can be deemed separate property to the extent the asset existed beforehand or was specifically excluded by agreement.

If a judge decides that the outside business interest is marital property, they typically treat it in a similar way as a house, retirement account, or similar asset when determining the fairest division of the interest.

Valuing a Business Interest Isn't Just Simple Math

Valuing a partial interest in a closely held business is complex. Questions about the nature of the interest, the control it provides, and whether anyone would realistically buy it all affect the business’s value. It’s important to consider:

• Discount for lack of control. A minority owner may have little or no ability to influence important business decisions, such as when profits are distributed, to direct or influence the company’s operations, or to force a sale. These limitations likely make purchasing the business interest less attractive to hypothetical buyers. You may have heard this concept called “discount for lack of control” or a “minority discount.” So, a non-controlling interest may be worth less than a simple pro-rata share of the entire company.
• Discount for lack of marketability. Shares of a publicly traded company can generally be sold in an established market. A partial interest in a small, privately held company is another matter. Few people may be willing to invest in a business where they would share ownership with existing partners and have limited control over the company's operations. That difficulty in finding a buyer can reduce the fair market value of the interest.
• Difference between a capital account and fair market value. A partner’s capital account or the value assigned to an ownership interest on the company’s books does not necessarily reflect what that interest would sell for. Accounting records serve specific financial and tax purposes, whereas a divorce valuation addresses a different question about the economic value of the ownership interest. Therefore, treating the number on a balance sheet or in a capital account as the interest's value can be misleading.

Neither spouse should rely on simple math; it’s often better to look beyond multiplying the company's present value by the spouse’s ownership percentage. Such a simple calculation wouldn’t capture the whole picture, no matter which side of the divorce mediation table you’re seated on. The adjustments listed above can significantly change the number both spouses are negotiating around. And the complexity of valuing a business interest is why many spouses choose to bring in a qualified business valuation expert rather than a general accountant.

Partnership Income Can Affect Support, Not Just Property Division

Valuing the ownership interest answers one financial question. But what happens if the business interest produces income for the spouse who owns it, and that income will likely continue after the property division is resolved?

Income from a business partnership can factor into child support calculations, as well as spousal support requests. In other words, the business doesn’t always disappear from the post-divorce financial picture once it’s divided. This distinction matters because the value of an asset and the income it generates are separate questions. A careful analysis of the business's financial records can help determine the ownership interest's current value and clarify the owner’s ongoing financial circumstances.

How Business Interest Issues Usually Get Resolved in Divorce

After characterizing and valuing the interest in the business partnership in divorce, the practical question remains: What happens next?

Dividing the ownership interest between the spouses is rarely an attractive option when an unrelated partner is involved. Making an owner’s former spouse a new co-owner could create obvious problems. Instead, these cases commonly result in a buyout or property offset. The owner-spouse retains their interest in the business, and the other spouse receives cash, additional marital property, or a combination that reflects their marital share of the business interest.

A sale to an outside buyer is theoretically another option, but partial interests in closely held companies are often difficult to sell. The same lack of marketability that affects valuation also makes finding a willing buyer challenging in practice.

Back to the unrelated business partner, while their interest remains outside the divorce, a partner may seek to get involved to protect their interest. This is another reason these cases often focus on determining the value of the divorcing spouse’s interest. It helps partners find a practical way to account for that value without disrupting the business's ownership.

Talk to an Attorney Before Valuing a Business Partnership in Divorce

A business owned with an outside partner adds a layer to property division that doesn’t exist when one spouse owns a business outright. Determining what portion of the interest is marital property is the beginning. Next comes the more complex step of valuing that interest, which may depend heavily on control rights, marketability, or other factors.

The bottom line is that getting the valuation right matters for both sides.

Mark A. Wortman, Attorney at Law, LC helps Kansas City area clients address property division involving businesses and partnership interests, including working with valuation professionals when appropriate. If a business partnership interest may be part of your divorce, contact Mark A. Wortman, Attorney at Law, LC to discuss how that interest may affect your property division.