What to Do If You’re Divorcing Your Spouse — and You Work for Their Business

Small businesses drive the economy in Maryland. In fact, 604,176 small businesses are in the state, making up 99.5% of all Maryland businesses. Families own many of those businesses, and the workforce within them might be made up of close relatives. Unfortunately, this means that if a marriage breaks up, the business considerations can drastically complicate an already challenging situation.

The problem is even worse when the partners are older and have spent many years – decades even – working together in the company. With the rise in “gray divorces,” these issues are becoming more common across Maryland. Here is some helpful information in case you find yourself struggling to figure out what to do in one of these situations.

The rise of gray divorce

Gray divorces, which occur when the parties are past the age of 50, are on the rise. In fact, since 1990, the rate of divorce among those 50 and up doubled, while the rate of divorce among those 65 and up tripled. These are often long-term marriages where the parties have completely entangled their finances, property, and in many cases, businesses. Not only have the spouses both contributed toward the success of these businesses over the years, but they also may have emotional ties after devoting so much attention and loyalty to the business. This can make it extremely challenging to determine how to handle the business assets and interests when a couple is going their separate ways.

Maryland divorce law basics: Equitable distribution

Before looking into businesses specifically, it’s important to note that Maryland uses an equitable distribution system. What this means is that the courts don’t seek to divide property 50/50. Instead, they look to determine what’s “fair.”

They might transfer ownership of certain types of property, such as:

• Pensions
• Retirement accounts
• Profit-sharing, or deferred compensation plans
• Family use of personal property (with lienholder consent)
• Jointly owned real property used as the marital home (subject to liens and specific conditions)
• Grant a monetary award to balance the division of marital property

The court looks at certain factors when trying to determine what would be fair. Some of the considerations include:

• Each party’s financial and non-financial contributions to the family
• Value of each party’s assets
• Economic circumstances and needs
• Reasons for the marital breakdown
• Length of the marriage and age/health of each spouse
• How and when the property was acquired
• Any related awards (e.g., alimony or use of the family home)
• Any other relevant factors

The difference between marital vs. non-marital property

Courts look at property differently depending on whether they deem it marital or nonmarital. Non-marital property is that owned by a person, not the couple. Property from prior to the marriage is often non-marital, as are inheritances during the marriage from a third party (however, non-marital property can lose its status if the parties commingle it with marital assets or use it for marital purposes without clear documentation).

A business started during the marriage is typically considered marital property, particularly if it was funded with marital assets or both spouses contributed to its success. In contrast, a business started prior to marriage would be non-marital, but with some exceptions. For instance, increases in the value of the business during the marriage may be marital. Another issue is whether the spouse who did not own the business contributed to its growth.

This can become complicated, so the best thing to do is to start speaking to an attorney about how best to protect your interests related to the business.

If you work for the business, not own it: What’s at stake?

For spouses who work at the business but aren’t the official owners, divorce can present some unsettling financial considerations. It becomes important to start documenting your involvement. Are you on payroll? Do you receive benefits? Are you contributing to the business operations?

There is a good chance that the divorce could mean the loss of your job. You will need to discuss that risk and your options with your lawyer. While you might not be directly compensated for your work, your role in growing a marital business can affect the division of assets or support awards such as alimony. You may be able to negotiate a buyout or collect a larger share of non-business assets to account for the loss of your interests in the business.

Valuing the business

Another issue that will likely come up is the true value of the business. For instance, if the agreement is that your spouse will buy you out, you need some way to determine a fair amount. There are a few ways to place a valuation on a business. Methods used in Maryland divorces include the following:

• An asset-based approach
• An income/earnings approach
• Market value approach

Business valuation includes complicated calculations, and experts may be required to come up with a number that is fair and will support equitable distribution.

Remember that there are different ways to handle these situations. Here are a few potential scenarios to illustrate:

• A spouse works for 20 years at the family business their partner started, but they have no ownership stake. They did, however, play an integral role in the company’s success. Here, they might seek alimony and possibly, a share of the business’s value.
• A spouse co-owns and works at the business, but the parties are splitting up. Now, the approach might require full valuation and buyout discussions during divorce.
• A spouse works for the business, but is removed from their job during separation, leaving them without the means to support themselves. In this case, it may trigger emergency motions for support.

Your lawyer can help you determine the best way to proceed in your case.

Key steps to take if you’re divorcing and employed by the family business

If you’re on either side of a divorce that involves ownership of a family business, here are a few steps to take to protect yourself and your future.

Step 1: Talk to a family law attorney early

Don’t hesitate to contact a lawyer. Your attorney can help you understand your rights and guide you through some steps you might need to take, like which documents could be crucial in dividing the property.

Step 2: Gather documentation

With the help of your lawyer, make a list of the documents you’ll need. Among other things, you’ll likely want to collect your:

• Pay stubs
• W-2s
• Ownership records
• Emails
• Contracts and agreements

Step 3: Assess your financial dependence on the business

You’ll need to sit down and really take a deep dive into your financial reality. Remember to plan for post-divorce employment or retraining if necessary, and to look at your retirement assets.

Step 4: Consider your legal rights to the business

Even if you don’t own the business, you might be entitled to a share of its value if it’s deemed marital property or if your contributions significantly enhanced its worth during the marriage.

Step 5: Hire a financial expert if needed

If the company’s finances are complicated, you might need to hire a financial expert. Sometimes, unfortunately, spouses may also try to hide income, making it important to have someone review the records and ensure everything is above board before you reach an agreement. Your lawyer should be able to acquire an expert to offer these services.

Step 6: Consider settlement strategies

Not everything needs to be settled through a trial. It’s often possible, and even beneficial, to reach a settlement instead of litigating these matters. There might be ways to keep the business intact while protecting the rights and interests of the party who is not an owner.

Special considerations for gray divorces

In long-term marriages, there is an increased likelihood that finances will be intermingled and that parties will have an emotional tie to the family business. The spouses might also be in a more difficult spot when it comes to preparing for retirement or finding a new career. Courts understand these challenges and might be more inclined to award alimony as a financial safeguard.

Attorneys will also need to review retirement assets and Social Security options, as well as documents like wills, powers of attorney, and business succession plans, all of which will likely need to be updated.

Final thoughts: Protecting your future

When a divorce involves a family business, the need for strategic planning and expert financial advice is more important than ever. You need to protect yourself by learning about your rights. The sooner you seek guidance, the better prepared you will be when facing the road ahead. Contact McCabe Russell today to discuss your claim with a Maryland divorce lawyer.