in a Separate Business
If one spouse owns a business before marriage and continues to own the business after marriage, the non-owner spouse may be entitled to have a lien on the separate business in the event of a dissolution of marriage. The amount of the lien is based on the “community interest” created during the marriage. A community interest arises when one or both of the spouses work in the business after marriage. In the past, if the parties were paid “adequate compensation” for the work preformed during the marriage, then the court could find that the community had no lien on or interest in the business even if it increased substantially during the marriage.
A recent case has analyzed the increase in value of a separate business owned before marriage, and determined that the community, and therefore the non-owner spouse, may be entitled to part or even the entire increase in the value of the business during the marriage. In Rueschenberg v. Rueschenberg, 1 CA-CIV 07-0300, decided on May 13, 2008, the Arizona Court of Appeals found that the community was entitled to two-thirds of the increase of value of a separate business, even though all profits from the business during the marriage were distributed to the husband and wife (the community) during the marriage.
This case changes the way the courts analyze the increase in value of a business started before marriage. As a result, the non-owning spouse may be entitled to more compensation from the owning spouse at divorce, for the value of the business.
Factors that the Court will consider in determining whether a community interest exists in a separate business and the amount of the interest are:
- The value of the business at the time of the marriage and at the time of the dissolution of marriage.
- The amount of compensation paid to the spouse (or both spouses) working in the business after the marriage.
- The work performed by each spouse.
- The amount of profit during the marriage over and above the salary or compensation paid to the spouses.
- The reason for the increase in value of the business during the marriage (whether due to work efforts of either or both spouses or due to market forces or interest attributes of the business assets).
If there is a business owned before the marriage that continues to operate after marriage; at the time of divorce the steps involved are:
- Obtain a valuation of business at time of marriage and at the time of divorce.
- Determine the amount of increase in value.
- Determine the level of compensation or pay to the spouse or spouses in the business.
- Determine how any profits were handled during the marriage and if they were distributed to the community or invested in the company.
- Determine all reasons for the increase in value of the business.
To avoid these conflicts, a premarital agreement between the parties would be recommended. A premarital agreement must be valid and binding on the parties and should specifically address the business and the treatment of the income, profits, and increase in value of the business.
The husband and wife may disagree as to the amount of the increase in value, the reasons for the increase in value, and the amount of compensation paid to the community during the marriage. These disagreements may result in the case having to be decided by a judge after a trial.
by: Sandra Tedlock