The 50/50 dilemma

Married couples will from time to time decide to carry their personal relationship over into their professional one, creating a partnership or corporation.  That is neither improper nor particular unusual, but it does create a complication if the couple later divorces.  Here’s why:

Under Virginia law, in the absence of an agreement by the parties, the judge is only permitted to transfer ownership of jointly titled assets. A judge cannot order a spouse to transfer solely titled assets, with the exception of retirement accounts that have different rules, to the other spouse, whether it’s a car, a home, or 50% of the stock in a closely held business.  And if each party owns 50%, then then value of the business to one party is very probably the same as the value to the other party.  Some attorneys have tried to develop theories under which 50/50 ownership doesn’t really mean 50/50 sharing of value, but such theories are complex and generally unsuccessful.

That means that many times, even after a fully litigated case, the divorce court simply leaves the business jointly owned with no value given from one party to the other.  They are left to resolve the business ownership issue to another time, and possibly to another court.

Occasionally, parties come to the realization that their business is the “goose that lays the golden eggs” and will seek to find a way to keep it operating even if they divorce.  This strategy can work, depending on the type of business and the level of animus between the couple.

Couples may also simply decide to sell the business as a going concern to third parties, or to wind it up and dissolve it. Again, these are not options a court will impose on the parties.

In negotiations, these problems can be solved.  If the parties can agree on the disposition of a business, through negotiated terms, those terms can be included in the divorce settlement documents and will be enforceable.  In these sorts of cases, then, the better option may be to find common ground and an acceptable resolution.  Otherwise, additional litigation in a different forum may remain to be handled even after the divorce ends.

Each of these approaches will generally mean that one or two other professionals beyond the divorce attorney will need to be consulted. The first will be a business valuation expert, who can place a value on the business. In divorces, the standard of valuation is “intrinsic value,” which is sometimes different from fair market value and generally means the value to the particular couple. The second is a business attorney, who can discuss and even prepare documents to set up a transfer of ownership if needed.

Of course, every case is different, and this summary is not intended as “one-size-fits-all” advice on something this central to many couples’ financial profile.  We can answer your questions about this topic and help chart a course toward an outcome – even if it requires the assistance of business attorneys and business valuation experts.