How are Businesses Divided in a Divorce in SC?

What happens when one or both spouses own a business or are self-employed in a divorce? How are the businesses divided?

In most cases, business interests are subject to equitable division in a divorce, even if it is not a “family business.” In this article, we will discuss how the family court determines the value of a business and how businesses are divided in South Carolina, including:

• Determining whether the business is a marital asset,
• Determining whether transmutation has converted a non-marital asset into a marital asset, and
• How the court determines the value of a business for purposes of equitable distribution in a divorce proceeding.

How are Businesses Divided in a SC Divorce?

How are businesses divided in South Carolina divorce cases?

First, we need to ask whether the business is a marital asset at all – if it is not considered a marital asset, it is not subject to equitable division.

Is the Business a Marital Asset?

Marital assets must be divided equitably during the divorce – this could include real estate, money held in bank accounts, vehicles, retirement accounts, 401k accounts, other types of investments, furniture, jewelry, or artwork.

Most things that hold value will be considered a marital asset – including a spouse’s business interests.

If it is not a marital asset, however, it is not subject to equitable division. A business may be considered non-marital property if it:

• Predates the marriage,
• Was received as a gift or inheritance,
• Was purchased with non-marital funds, or
• Was excluded as marital property by a prenuptial or postnuptial agreement.

Not all non-marital property stays that way, though…

Transmutation of Non-Marital Assets

Transmutation of non-marital property happens when the family court finds that you and your spouse intended to convert the non-marital property into marital property – something that, ironically, can happen unintentionally.

Non-marital property may be “transmuted” if there is evidence that:

• “The parties…. regarded the property as the common property of the marriage.” Jenkins v. Jenkins, 345 S.C. 88, 98, 545 S.E.2d 531, 537 (Ct. App. 2001),
• The property was titled in the names of both spouses,
• The property was transferred to the other spouse as a gift,
• The property was used exclusively for marital purposes,
• The non-marital property was used to build equity in the marital property, or
• The non-marital property was exchanged for marital property.

For example, if the husband owns a business before the marriage, and then uses the income from that business to support the marriage, that is probably not enough to transmute the business into a marital asset – there must be some additional evidence of the spouse’s intent to convert the property. See, Johnson v. Johnson, 296 S.C. 289, 295, 372 S.E.2d 107, 111 (Ct. App. 1988).

On the other hand, if the husband owns a business before the marriage, but then his wife leaves her former job to help run the business after the marriage, the court might then consider the business a marital asset even though the business predates the marriage.

How Do You Determine the Value of a Business in a Divorce?

If the business is going to be considered marital property that is subject to equitable division, you must determine the fair market value of the business, which may require an opinion from a certified public accountant or may require a more detailed forensic analysis, depending on the circumstances.

The three generally accepted methods for determining the value of a business are the income, market, or asset approaches.

Income Method

Using the income approach, the business is valued at the present value of its projected future earnings or cash flow, which is determined by estimating the future earnings and then adjusting the result for predicted changes in growth rate, taxes, and other variables.

Market Method

The market valuation approach values the business based on the market prices of comparable businesses that are currently available on the market or that have been recently sold, looking at the values of comparable businesses and making any appropriate adjustments for variations between the businesses.

Asset Method

Asset-based valuation uses the fair market value of the business’s total assets after deducting any liabilities, including real estate, machinery, equipment, furniture, and intangible assets like technology, the business’s goodwill, and intellectual property.

How are Businesses Divided in a Divorce?

Once you determine the value of a spouse’s business interests, how are the businesses divided as a practical matter, though?

There are many different possibilities depending on the party’s situation, including:

• Buyout – as part of a settlement agreement or the family court’s final order, a spouse can “trade” other assets or pay for the other spouse’s share of business interests. It could be a single payment as part of the divorce settlement, or it could be set up as payments made over time. In most cases, this is the ideal scenario that allows one spouse to continue operating the business.
• Sale of the business – the parties could agree (or the court might order if the parties don’t agree) to sell the business to a third party and split the proceeds.
• Each party retains their interest in the business – although each party could agree to retain their ownership interests in the business, this is generally frowned upon and may lead to future disputes and difficulties running the business.

Got Axelrod?

Contact your SC divorce attorney immediately if you are considering separation or divorce. Your divorce lawyer on the Axelrod team will answer your questions and help you to determine your next steps including calculating how marital assets and family businesses will be divided and assisting you in retaining the right experts to help you present your case.

Call Axelrod and Associates now at 843-258-4254 or send us a message through our website to find out how we can help.