Reviewed by Paul H. Townsend, ESQ.
Key Takeaways
- New Jersey divides a business under equitable distribution, not community property, so a spouse is not automatically entitled to half.
- A business started during the marriage is generally marital property; one owned beforehand is generally separate.
- For a premarital business, growth during the marriage from either spouse’s active efforts is marital, while purely market-driven growth stays separate.
- Once the marital portion is valued, it is usually handled through a buyout, continued co-ownership, or a sale.
When a couple gets a divorce, all marital property will be subject to division by the court unless the parties have otherwise been able to agree. This includes any business that one or both spouses owned during the marriage. While an individual may not be required to sell the company or sell assets within the company, each spouse may be entitled to a share of future profits.
How Does New Jersey Divide Marital Property?
New Jersey divides marital property in accordance with the equitable distribution statute (N.J.S.A. 2A:34-23.1). As such, businesses are divided in accordance with this law, meaning a spouse is not automatically entitled to half of the business.
Businesses owned by one spouse prior to the marriage will generally remain separate property, though increases in value that occur during the marriage that resulted from the efforts of either spouse are considered marital property and therefore subject to equitable distribution. As such, once the marital portion of the business has been valued, it may be bought out, sold, or the spouses may continue co-owning the business.
It is important to note that a judge will take into account whether or not the business grew substantially while a couple was married. In other words, if one spouse already owned a mature and thriving company prior to the marriage, the other spouse would be entitled to less during the property division process.
Business owners who are involved in a divorce are also urged not to hide personal or business assets or attempt to remove their former spouses from the company. In some cases, this may result in a divorce case being reopened or a court piercing the corporate veil. Hidden assets will also result in a longer and more expensive divorce proceeding.
Once a settlement is reached, it is important to have it approved by the court to ensure that no future claims can be made. Business owners who decide to marry again are advised to consider prenuptial agreements to help protect their assets.
Is My Business Marital or Separate Property?
Whether or not a spouse may claim part of a business depends on how it is classified in accordance with the equitable distribution statute. Because New Jersey adheres to this statute, marital assets are divided fairly, not automatically equally.
- Started during the marriage: A business established after a marriage is generally considered marital property, regardless of whether it’s only in one spouse’s name and the other spouse never worked for the business.
- Owned before the marriage: The value of the business prior to the marriage will generally remain separate property. The marital distribution period runs from the date on which the marriage occurs to the date on which the divorce complaint is filed.
Active vs. Passive Appreciation
One of the most contested matters in a divorce where one spouse owned a business prior to the marriage is what happens to its growth during the marriage. However, New Jersey law dictates how these matters should be handled:
- Active appreciation is marital: If the business’s growth can be attributed to the efforts of either spouse’s labor or management, or because marital funds were invested in the business, that increase in value will be subject to equitable distribution.
- It is important to understand that this can also include indirect growth supported by a spouse who maintains a household rather than actively working in the business.
- Passive appreciation stays separate: If the growth of the business can be attributed to outside market forces with no active effort from either spouse, that increase will typically remain the separate property of the spouse who owns it.
How Is the Business Valued and Divided?
Once marital assets are identified, they must be valued. In cases where businesses are involved, generally a qualified business valuation expert will determine the value of the business, and it will then be divided. New Jersey courts typically utilize a “fair value” standard, which may be different from what the business would earn in an open-market sale. In general, there are three ways in which business interests may be distributed:
- Buyout: One spouse may keep the business and compensate the other spouse for their share of the business. This may be paid through a lump sum, structured payment plan over time, or by trading other marital assets of equal value.
- Co-ownership: Both spouses may continue to own and operate a business after the divorce. This typically only works when the spouse can maintain a cooperative and professional relationship. Co-ownership typically is not recommended if the spouses cannot communicate effectively and respectfully.
- Sale: The business may be sold, and the proceeds of the sale are divided in accordance with the equitable distribution statute. Typically, this is the cleanest option, though a successful business may be difficult to sell quickly for its full value.
How Can I Protect My Business?
The strongest protections are put in place before problems arise:
- A prenuptial or postnuptial agreement can define in advance how the business will be treated if the marriage ends.
- A shareholder, partnership, or operating agreement can set ownership interests and restrict transfers.
- Good financial hygiene matters: keep business and personal finances separate, pay yourself a fair salary, and avoid commingling marital funds into the business, which can convert separate property into a marital asset.
It’s important to note that financial disclosures in divorce are not routinely reported to the IRS, which is often misreported in older guidance. Financial information is exchanged through the completion of a Case Information Statement, which is filed with the family court in accordance with Court Rule 5:5-2. Accuracy is critical, as misrepresenting business finances can result in a number of serious penalties.
Contact an Experienced New Jersey Divorce Firm Today
Business owners who are planning to get a divorce may benefit from seeking legal advice as soon as possible. Doing so may make it easier to create a settlement that is reasonable for both parties while also protecting the business going forward. Seeking legal counsel may make it possible to create a reasonable valuation of the company while possibly establishing that most of the company’s growth occurred prior to the marriage. That’s why it’s in your best interest to connect with an experienced attorney with Townsend, Tomaio, Newmark & Clancy, LLC. Contact us today to learn how we can assist you through these difficult times.
