Business Owner Divorce in North Carolina

As an “equitable distribution” state, North Carolina views all property acquired during a marriage as subject to an equitable split during a divorce. Under North Carolina General Statute § 50-20, marital property is real and personal property acquired by either spouse or both spouses during the marriage and before the date of separation.

However, when assets are obtained before marriage, including a business, they are regarded as separate property, not subject to equitable distribution. In other words, if you started your business before you were married, your business is your separate property. Additionally, any prenuptial or postnuptial agreement made that lists your business as your asset offers protections that prevent your business from being subject to equitable distribution.

In the event you started your North Carolina business after your marriage, the court will view it as property to be distributed equitably between you and your spouse during a divorce using the following process:

1. The court determines assets and debts retained by each spouse.
2. Assets and debts are categorized as separate, marital, or divisible.
3. A value is placed on each asset and debt.
4. Assets and debts are distributed equitably. Note that while “equitable” sometimes means “equal,” a judge may consider the health, age, and income of each spouse to decide what is reasonable, mainly if one or both owns a business.

The court will also consider a business’s legal structure, each spouse’s role in the business, and business assets acquired during the marriage when determining an equitable division.

One of the best ways to protect your business interests if you own a business before getting married or expect to acquire one after getting married is through a prenuptial agreement. Suppose the agreement specifies your business as separate property, with all of its assets and liabilities. In that case, you do not need to worry about splitting it equitably in the event of a divorce.

If you are already married when you form your business, a postnuptial agreement may also be an alternative to protect your business as separate property. Another option relates to the bylaws of your business, where you could designate sole rights to the business in the case of a divorce. One option is to consider establishing an agreement and a decided-upon valuation method for coming up with a selling price.

When divorcing spouses agree, they can split a business with its assets and debts however they want. When they disagree, the court will ensure that the business is divided in one of the following ways:

• One spouse buys out the other spouse’s interest in the jointly owned business. Depending on the circumstances, this may be accomplished through a series of payments or a one-time lump sum payment.
• Divorcing spouses sell the business to a third party and split the proceeds.
• Both spouses continue to run the business together even after the divorce is finalized.
• The business’s assets are divided through equitable distribution.

Should divorcing spouses choose to sell a business, or if one spouse opts to buy out the other spouse’s interests in the business, the business’s assets and liabilities must be reasonably valued. The two most widely used techniques of business valuation for businesses in North Carolina include:

• Market value: The business’s value is based on what an outside buyer would pay for it while considering capacity for future earnings.
• Book value: The business’s value represents the assets minus liabilities specified in the company’s records, net depreciation, and adjusted for market value appreciation.

It’s not uncommon to hire a business consultant to assess various factors to estimate a business’s value, including its records, physical and digital assets, as well as the current market. In most cases, divorcing spouses will work with their attorneys and a third party, like a mediator, to determine how a business will be equitably divided.

Suppose you cannot agree with your divorcing spouse outside of court. In that case, you may file a claim for equitable distribution. In doing this, you ask the court to issue an order detailing how you will split all your assets in the divorce. Each spouse’s respective lawyer would present their client’s arguments before the judge makes the final decision.

When you own a business in North Carolina, the fate of your business depends on the steps you take before the state requires you to divide your marital property equitably. Even if you started the business before you were married to your spouse, they may still receive a portion of your business. Take these actions to protect the value of your business: 

Record All Business Contributions Made by Your Spouse 

If your spouse contributes to your business in any way, comprehensively document these contributions. These records may establish a fair arrangement when you negotiate the division of your business. 

Take a Salary from Your Business 

While it could seem contradictory to pay yourself for the work you do as a business owner, taking this step may help your business in a divorce. If you do not take a salary, your spouse may argue to take a larger portion of the marital property because you did not contribute to the household expenses. 

Establish a Written Agreement to Protect Your Business 

It is best to establish a written agreement or business bylaw to have contractual protection of your business to document the share each partner would receive in the divorce. This can be set in a prenuptial agreement.