If you’re a business owner facing a divorce, you’re likely extremely concerned about the future of your business, as it’s something you’ve poured years of your life into. Unfortunately, unless you have certain protections in place via a prenuptial agreement, postnuptial agreement, or something similar, your business may very well be subject to equitable distribution. Continue reading to learn more about what this means and how our seasoned Providence property division lawyers can help protect your interests throughout the process. Here are some of the questions you may have:

Is a Business Considered Marital Property in Rhode Island?

In many cases, yes. Generally speaking, if a business was started during the marriage, Rhode Island courts may consider it marital property, which means it could become subject to division during the divorce process. Even if a business was started before the marriage, the court may still determine that part of the business became marital property over time, particularly if the business increased substantially in value during the marriage itself. The court may also consider whether marital funds, marital labor, or marital resources contributed to the business’s growth.

Courts may consider several factors when determining whether a business is marital property, including the following:

  • When the business was created
  • Whether marital funds were invested into the business
  • Whether the non-owner spouse contributed to the business
  • Whether the business increased in value during the marriage
  • Whether both spouses relied upon business income during the marriage
  • Whether personal and business finances were kept separate
  • Whether the business owner spouse drew income, retained earnings, or reinvested profits during the marriage

Additionally, courts do not always look solely at direct financial contributions. In many situations, one spouse may have stayed home with children, handled household responsibilities, or otherwise supported the family while the other spouse focused heavily on operating and growing the business. These contributions may still be considered during the equitable distribution process.

How Do Rhode Island Courts Divide a Business During Divorce?

Rhode Island follows what is known as equitable distribution. Simply put, equitable distribution does not necessarily mean an equal 50/50 split. Instead, the courts will divide marital property in a manner they believe is fair under the circumstances.

Before a business can be divided, it first has to be valued properly. Business valuation can often be one of the most heavily disputed aspects of a divorce involving a company or professional practice. Depending on the situation, financial experts, accountants, or business valuation professionals may become involved to determine what the business is actually worth. Several factors may be considered when valuing a business, including the following:

  • Business revenue and profits
  • Existing debts and liabilities
  • Business assets
  • Future earning potential
  • Ownership interests
  • Market conditions
  • Goodwill associated with the business
  • Cash flow
  • Accounts receivable
  • Equipment, inventory, and real estate owned by the business
  • The business’s customer base, contracts, and overall financial history

Once the value of the business is determined, the court may approach division in several different ways. In some situations, one spouse may buy out the other spouse’s interest in the business. In others, one spouse may keep the business while the other receives a larger share of different marital assets to offset the value. Though less common, there are also situations where former spouses continue co-owning a business after divorce.

In many cases, the goal is to avoid unnecessarily disrupting the business while still ensuring that marital property is divided fairly. This is especially important when the business serves as a source of income for one or both spouses.

What Can I Do to Protect My Business During Divorce?

There are several steps business owners may take to help protect their interests during divorce proceedings. For example, prenuptial or postnuptial agreements are often used to establish how a business will be treated if the marriage eventually ends in divorce.

Additionally, you should always keep detailed records of your finances. In many cases, disputes arise when personal and business finances become heavily intertwined, making it more difficult to determine what portion of a business may actually qualify as marital property. Clear bookkeeping, separate bank accounts, accurate tax records, and properly maintained corporate documents can all become important in a divorce involving a business.

Business owners should also avoid making major financial decisions during divorce proceedings without first speaking with an attorney. Attempting to hide assets, transfer ownership improperly, or undervalue a business can create serious legal issues and may ultimately harm your position in court.

Why Is Business Valuation So Important?

Business valuation is often one of the most critical parts of a divorce involving a company or professional practice. If the business is undervalued, one spouse may not receive a fair share of the marital estate. If the business is overvalued, the owner spouse may be required to give up more than is appropriate.

For this reason, it is important to work with an attorney who understands how business interests are handled in divorce and who can help ensure that the valuation process is thorough, accurate, and fair. Depending on the facts of the case, this may involve reviewing financial statements, tax returns, profit and loss records, debt obligations, ownership documents, and expert reports.

If you have further questions about how to best protect your business or you are going through the divorce process and need an attorney, please don’t hesitate to contact Caprio Law for an initial consultation today.