Divorce is perhaps most commonly associated with division: a couple is divided as two people part ways; their assets are divided during the division of assets process; time with children is divided with child custody, parenting time, and visitation arrangements; and often, incomes are divided with alimony and spousal support. The process of dividing a shared life is complex and subject to a host of influential factors, which have been identified and refined through decades of divorce case law. As far as assets are concerned, New Jersey operates under an equitable distribution model. Unlike other states, where all assets are considered “community property,” New Jersey delineates certain assets as “marital property” and others as “separate property.” A fair asset division is then determined through a multi-faceted process, the result of which must be fair but may not necessarily be equal. Although all assets may have some combination of financial and sentimental value, businesses are among the most significant forms of property to be assessed and divided during divorce. As a result, negotiations or litigation proceedings regarding closely held business often devolve into contentious battles with long-term implications. This article will serve as a resource for business owners who are considering or currently pursuing divorce, providing you with the information you need to protect your rights and your interests.
First and foremost, it is important to define the types of businesses to which this article refers. “Closely held businesses” are defined by the IRS as businesses with more than half of their shares owned (directly or indirectly) by five or fewer individuals. Many times, these privately owned companies are partially owned by members of the same family and/or married couples. As such, they often become the subject of division during divorce proceedings. Before an equitable division regarding a business can be determined, the business must be accurately valued. In the vast majority of cases, a business valuation expert is called upon by one or both parties to conduct an extensive business valuation. It is important to note that although New Jersey courts have provided guidance with regard to the standard for business valuation, this process is far more an art than a science.
One of the most significant aspects of a business valuation for a business owner in the midst of a divorce is the extent to which the income generated by the business will impact determinations involving division of assets, alimony, and/or child support. Consider that most business valuations evaluate the value of the business owner’s interest by examining the income that the business owner receives directly from the business. In other words, what financial gain does the business provide to you? This value may be subject to equitable distribution during the division of assets process. Consider as well that your annual income as a primary breadwinner is also used to assess appropriate payments for alimony and child support, if applicable. This ultimately results in a two-fold benefit for the receiving spouse, as he or she benefits from the income generated by the business owner as it relates to the division of the business itself, and the income that is also used to appropriate alimony payments. These situations are further compounded when the business owner is essential to the every-day functioning of the business, as the business’s value is highly contingent upon his or her presence and willingness to work.
So, what does this all mean? Essentially, it means that business owners are highly vulnerable to financial depletion at the expense of their spouses during divorce proceedings. This vulnerability underscores the need for a New Jersey divorce attorney who has extensive knowledge and experience in the realm of division of business assets. Your divorce lawyer should have leading business valuation experts at their disposal and should be prepared to raise critical issues when arguing on your behalf.
For example, the value of the business does not need to be subject to the same distribution percentage as other assets. If your spouse did not directly or indirectly contribute to the growth of the business, he or she may also be entitled to a lesser percentage. Additionally, New Jersey law states that the division of assets arrangement should be considered when awarding alimony. As such, your alimony payments should reflect, at least in part, the portion of the business that your spouse is awarded. The arguments relevant to your case will be determined by your specific circumstances and the discussions between you and your legal counsel.
Your lawyer should serve as your greatest asset in achieving a favorable outcome. If you are considering divorce, or have recently filed, and are the partial or sole owner of a business in New Jersey, contact the seasoned New Jersey divorce attorneys at Townsend, Tomaio & Newmark for a free consultation.