Divorce can be one of the most emotionally and financially challenging experiences a person faces, and for small business owners, the stakes are even higher. While it’s often assumed that assets are divided 50/50 in a divorce, a judge can sometimes consider different factors for a more equal asset division.
Questions about what will happen to your business can add to your stress and uncertainty. Will it be considered marital property? Could you be forced to sell or divide it? Here, we’ll walk you through what you need to know about what could happen to your small business during a divorce.
1. Is Your Business Marital Property?
The first step in determining what happens to your business during a divorce is figuring out whether it qualifies as marital property—assets acquired or grown during the marriage.
Even if you founded the business before tying the knot, any increase in its value, contributions made by your spouse, or commingling of assets (such as using joint funds or shared labor) could make all or part of it subject to division.
Each state has different rules regarding property division, especially in community property vs. equitable distribution states, so knowing how your jurisdiction treats business ownership is crucial.
2. Valuing the Business: What Is It Worth?
If your business is considered marital property, the next step is determining its value. This usually requires a professional business valuation, which can be conducted using one of several methods: asset-based, income-based, or market-based.
The valuation process takes into account your company’s financials, intellectual property, client contracts, and goodwill. The typical small business usually has anywhere from 250 to 1,500 employees, but if you run a start-up or you’re an entrepreneur, the size may be considered smaller. The goal is to establish a fair market value that can be used in the divorce negotiations. Having clean, well-documented financial records can significantly streamline this step and help you advocate for an accurate valuation.
3. Options for Dividing or Protecting the Business
Once the value is determined, you and your spouse (or the court) must decide how to handle the business. There are generally three options: one spouse buys out the other’s interest, both spouses continue to co-own the business post-divorce (which is rare but possible), or the business is sold and the proceeds are divided.
Many business owners aim to retain full control by negotiating a buyout using cash, other marital assets, or structured payments. In some cases, prenuptial or postnuptial agreements can protect business interests before a divorce ever happens. If you don’t have one, working with a legal and financial team during the divorce is key to protecting your livelihood.
4. Your Spouse’s Role in the Business
If your spouse was actively involved in the business, whether as a co-owner, employee, advisor, or unpaid supporter, their contributions could influence the division of business assets.
Courts often consider not just financial investments but also non-financial support, such as helping with marketing, bookkeeping, or even enabling you to grow the business by managing home responsibilities. Understanding and documenting their role can help you prepare for negotiations and avoid surprises during divorce proceedings.
5. How Divorce Affects Business Operations
Divorce can cause disruption not only in your personal life but also in your business operations. If the process becomes contentious or prolonged, it may affect your focus, cash flow, decision-making, and even employee morale.
In some cases, temporary court orders may restrict business decisions during the proceedings. It’s wise to communicate carefully with business partners, clients, and key employees to maintain trust and continuity, while also protecting sensitive business information that could become part of legal disclosures.
6. Strategies to Protect Your Business Before and During Marriage
While it’s ideal to address business ownership before marital trouble arises, there are still steps you can take during marriage or even amid a pending divorce to minimize risks. Prenuptial and postnuptial agreements are among the strongest tools for protecting a business, clearly outlining what remains separate property.
Structuring your business as a corporation or LLC and maintaining clear financial boundaries between personal and business assets can also help. Additionally, shareholder or partnership agreements that include buy-sell provisions can safeguard against forced sales or unwanted involvement from a divorcing spouse.
7. Tax Implications of Dividing a Business
Dividing or transferring business interests during a divorce can come with complex tax consequences. While transfers of property between spouses due to divorce are typically non-taxable at the time of transfer, the longer-term capital gains implications can be significant, especially if one spouse eventually sells the business.
Additionally, buyouts, restructured ownership, or selling the business altogether may trigger tax events that affect your financial future. It’s important to consult with a tax professional or financial advisor who understands divorce-related tax issues to avoid costly surprises.
8. When to Get Professional Help
Handling a small business during a divorce is rarely a simple DIY task. The decisions you make can have long-lasting consequences for both your personal finances and the future of your company.
Working with a team that includes a family law attorney experienced in business assets, a CPA or forensic accountant, and possibly a business valuation expert is crucial. These professionals can help ensure your business is fairly assessed, your rights are protected, and you make informed decisions throughout the process.
Protecting What You’ve Built
Your small business likely represents years of hard work, risk-taking, and personal sacrifice, so protecting it during a divorce is not just about money, it’s about your future.
Knowing how your business fits into the legal and financial landscape of a divorce will help you navigate the process with greater clarity and confidence. By taking proactive steps, seeking expert guidance, and knowing your rights, you can weather the storm of divorce while safeguarding the business you’ve worked so hard to build.