What happens to your business if you and your spouse divorce? Do you each have ownership of the company? Do you both take part in the day-to-day of the business? Are you both managers of the business?
If you are both owners of the business, there are a few options for going forward: maintain the status quo; one or both of you sell your portion of the business; both parties stay involved under a new management and/or ownership structure; dissolve the business; or let the court decide.
The right option for your business will likely depend on the condition of your relationship with your soon to be ex-spouse, as well as the management structure and entity type of your business. However, regardless of what option you choose, it would be a good idea to keep your employees informed. You should limit the information you share to the level you are comfortable with and to the level it involves the business and the employees, but keep the employees on notice that major changes will be coming. This notice may provide a smoother business transition and help employees anticipate/accept management restructuring.
Below I have listed a few options you could consider, but this is not an exhaustive list:
Maintain Status Quo
Depending on the way the business was structured and the relationship between you and your ex, you may be able to continue running the business the same as you did while married. While possible, this option seems unlikely for most businesses where both spouses were involved. You will need to make this decision with your ex, which should be a good opportunity to test your ability to continue to solve business problems.
Both Parties Stay Involved
Maintaining the status quo may be an easier option early on, but it is more likely that you and your ex will need to make changes to the business. If the relationship remains respectful, then maybe you can design a new way of running the company that allows both of you to stay involved. This may mean that one person manages day-to-day business affairs, while the other person retains voting power on major decisions. Alternatively, it may mean one person has general control of the company while the other becomes a limited or silent partner. These are just a few options that exist, but you and your ex will need to discuss what is best for the business. It is also a good idea to consider hiring a business consultant to help you explore alternative business models that will allow both parties to stay involved without hurting the business.
One Party Buyout
If both parties cannot work together and/or stay in the business together, perhaps the best option is to consider having one party buy the other party’s portion of the business. This may be a great option in a situation where one spouse was not very active in the business. In this case, the value of each party’s interest in the company will be determined by any operating agreements, articles of incorporation, or other formation documents you created for your business. If these agreements do not exist or you do not understand what they say, talk to an attorney!
Dissolve/Close The Business
In the event that the business requires both parties, but neither party wishes to continue working with the other, then dissolution of the company may be the only reasonable decision. The procedure for dissolution will vary for different businesses and depending on your formation agreements, but you can expect a few things. For one, if you are closing the business and not selling to a third party, you will need to settle any debts the business owes. After the debts of the business are settled, any remaining business assets will be sold or distributed in accordance with each owner’s share of the company. Once again, if you are not sure what your formation agreements say, or you do not have any, then talk to an attorney for help.
Neither Party Agrees On Outcome
What happens if you and your ex-spouse are unable to decide what to do? Well, it depends. Did you create operating agreements and discuss what may happen in the event of a divorce or separation? Did the agreement discuss how the company may be dissolved or how an owner’s rights may be transferred? Did the agreement discuss what would happen if there were any disputes between owners or disputes over valuation, dissolution, or any other major business concerns? If the agreements do not address these topics, then the Washington Code that governs your entity type will explain what is to be done. For example, if your business is a partnership then the Revised Code of Washington, Title 25, will control it.However, when deciding what is right for the future management of your business, I would not recommend leaving those important decisions to the default provisions of the Washington Code. This is not because the Code is unreasonable, but because the people running the business, not the default judgment of legislators, administrative committees, or judges, should make business decisions. Therefore, if you do not already have signed agreements with your spouse on how to handle these difficult decisions, talk to them about it now.
For some, it may already be too late. You may be going through divorce now and realizing you do not have agreements in place. Do not worry or panic, instead learn about your options by reaching out to an attorney or asking another legal professional for a referral.
If you have any questions about your business and/or how your divorce may impact your business, please reach out to an attorney and discuss your options. With the proper guidance and planning, your business can transition through your divorce and continue to thrive.
Copyright of Jeff Hamilton December 2018