If your business is a sole proprietorship, then you will own an unincorporated business yourself, with no other owners. A sole proprietor business can be considered to be a financial asset in law, while other business structures may allow for the company to be viewed as a separate entity. It’s therefore important to know the facts about sole proprietorships.
It can be difficult to know where you stand initially, especially if you are not accustomed to legal terminology, a helpful starting point is to familiarise yourself with some of the terms used in both business and law – see this family law glossary by Wise Law. Meanwhile, let’s take a look at the basic facts you need to know on getting divorced when you have a sole proprietorship.
Community property
If you live in a community property state, and you started your business after you got married, then your spouse can be entitled to a claim for half of your business in some cases. However, in common law states, your former partner could be entitled to an equitable distribution of financial assets, this does not necessarily mean a 50/50 split.
When was the business started?
Another key consideration when looking at financial assets, is the period of time when your sole proprietor business was started. If it was established prior to marriage, your ex-spouse will not have the same right to claim anything, but they could have a claim on any assets that were purchased for it after you got married. In addition, if there was a contribution from your spouse to the business while you were married, they could also be entitled to make a claim for that too. Assets that were purchased while you were married, are considered to be marital property, in other words, property that can be evenly distributed.
Valuation
Valuation of a sole proprietorship can become complicated because you and your business are one in the same, making the lines a little blurry. However, because there is just one owner who is responsible for the assets and debts of the business, in some ways, making a valuation is easier. You can get your business professional appraised by a certified appraiser to discover exactly how much your business is worth. A CVA will go through your business papers and records to make an accurate financial judgement. The courts will need an idea of the valuation before it is able to divide it up fairly. It can also be helpful to hire a qualified bookkeeper to ensure your accounts are all up-to-date and explainable to the courts, if needed.
What is sweat equity?
A significant factor to consider is if your partner contributed to what is known as ‘sweat equity’ into the setting up and building of your sole trader business. This, in some cases, can give them a claim on the company during a divorce, especially if they can prove they put in efforts to get the business going, and were not correctly compensated for it as an employee would be.
Conclusion
There are a number of elements of a divorce involving a business that can make it more complex than those without. One key piece of advice before beginning, is to consider who will be the owner of the company once you have divorced. Thinking about this and knowing which laws you will need to adhere to are a good starting point for beginning a discussion with your divorce attorney, and your former partner. Seeking legal advice from a solicitor with experience in both family law and business is highly recommended.