Protecting Family Businesses during a Virginia Divorce

When a marriage ends, the emotional and financial toll can be overwhelming. If you own a family business, the stakes can be even higher. A family business is so much more than just a source of income. It’s often intertwined with your personal identity and carries significant sentimental value. With so much on the line, it’s critically important for you to work with an experienced Virginia family law attorney and take the right steps to safeguard your business. 

Are Family Businesses Considered Separate or Marital Property in Virginia? 

Under Virginia law, any property that you owned prior to your marriage and any property you inherit or receive as a gift during the course of your marriage can be considered separate property. What it means is that if you founded or took over your family business before your marriage, it can be considered separate property. 

It should be noted that there are two major exceptions to the aforementioned rule. 

Your Spouse’s Contributions to Your Family Business 

If your spouse made an investment in your family business, worked in any capacity, managed the business along with you, or directly or indirectly contributed to its growth in any way, it cannot be considered separate property entirely. The increase in your business’s value during the course of your marriage can be considered marital property and divided between you and your spouse under Virginia’s equitable distribution laws. 

Commingling of Funds 

Commingling refers to the mixing of separate assets with marital assets. Under the law, if a separate property gets commingled with marital property, it could be partially or fully considered marital property as a result. For example, if you deposit your business income into a joint account or use your marital assets for business expenses, your family business could get commingled with other marital assets. As a result, your spouse might be entitled to a portion of your business. 

Proactive Measures You Can Take to Divorce-Proof Your Family Business

As a business owner, there are several steps you can take proactively during the course of your marriage to keep your business entirely separate from your other marital assets. These include: 

Establish a Clear Ownership Structure

To ensure your family business remains separate property, it is essential to establish a clear and well-documented ownership structure. If you started the business before marriage, ensure the business is formally titled in your name alone. If there are multiple partners, make sure you have legal agreements in place that outline each party’s rights and responsibilities.

Consider a Prenuptial or Postnuptial Agreement

One of the most effective ways to protect your family business is through a prenuptial or postnuptial agreement. The agreement must clearly state that the business is separate property and that any increase in its value during the marriage should remain yours, not subject to division in the event of a divorce. 

Keep Business Finances Separate

To maintain the integrity of your business as separate property, it is essential to keep the business’s finances distinct from your personal or marital finances. This includes maintaining separate bank accounts, credit cards, and financial records for the business. Avoid using business funds for personal expenses or marital obligations, as this could lead to commingling, which could open the door for the business to be classified as marital property.

Document Your Spouse’s Contributions

If your spouse has contributed to the business in some capacity – whether financially, in management, or through labor – carefully document these contributions. This is important, as any increase in your business’s value due to your spouse’s contributions can be considered marital property. By keeping detailed records, you can argue that your spouse’s role was minimal or not sufficient to warrant a claim to the business itself.

It’s also critical to keep detailed records of the compensation and other benefits paid to your spouse for their work in the business. By doing so, you can make the argument that their contributions to the business should be recognized as compensated labor, not a claim to ownership. 

Set Up a Business Trust or a Family Limited Partnership 

If you’re concerned about future threats to the family business, setting up a business trust or a family limited partnership (FLP) can be an effective strategy. These legal structures can provide protection by keeping ownership within the family and limiting the ability of your spouse to claim ownership in the event of a divorce. By transferring ownership of the business into an FLP or trust before the marriage, you can create a clear legal separation between the business and marital assets.

How to Protect Your Family Business during a Divorce

When you are facing a divorce, protecting your business interests should be one of your topmost priorities. Even if you owned the business prior to the marriage, it could still be at risk of being divided or sold, especially if its value has increased during the marriage. Fortunately, there are several strategies you can use during the divorce process to safeguard the business and ensure that it remains in your control. These include: 

Negotiating a Buyout Agreement

A buyout agreement allows you to buy your spouse’s interest in your business, effectively removing their claim. It allows you to retain full ownership and control of your business while compensating your spouse for their contributions to your business. 

Offering Other Assets in Exchange

If a buyout is not feasible, you can offset your spouse’s claim in your family business by offering other assets of equivalent value. This could include real estate, a portion of your investments, a portion of your retirement accounts, or any other asset. 

Providing Equity without Management Rights

If a buyout or asset exchange is not feasible, you can offer your spouse a share of your family business while ensuring they have no say in its management or day-to-day operations. This option can help you retain full control over your family business while addressing your spouse’s financial interests. 

How a Virginia Family Law Attorney Can Help Protect Your Family Business

A skilled Virginia divorce lawyer can play an important role in protecting your family business during a divorce. Apart from handling the legal formalities, they can serve as a strategic partner and make sure that your business remains intact, properly valued, and shielded from an unfair division. Here’s how they can help you: 

Drafting a Buyout or Settlement Agreement

One of the most effective ways to protect your business is through a buyout agreement or a settlement agreement. 

In a buyout agreement, your lawyer can help negotiate the terms and make sure that the payment structure is reasonable and does not jeopardize the financial health of the business. If a buyout is not possible, your lawyer can help create a settlement agreement where you can offer other assets or a share in your family business in exchange for full control of the business.

Working with Experts for Accurate Business Valuation

A proper valuation of your family business is essential to ensure that its worth is accurately assessed, particularly if its value has increased during the marriage. Overvaluing or undervaluing the business could result in an unfair division of assets. Your lawyer can work with business valuators, accountants, and other experts to accurately assess the current value of your business, calculate the increase in your business’s value due to your spouse’s contributions, and make sure you do not pay more than you should. 

Facilitating Negotiations and Mediation

Divorces involving family businesses can be emotionally charged, with both parties feeling protective of what they have built. Your lawyer can serve as a negotiator to help prevent tensions from escalating into a contentious legal battle. Through strong negotiations, your lawyer can help keep communication open between you and your spouse, facilitate productive discussions, and help you achieve a fair resolution.

Ongoing Support and Advice

Divorce does not end when the papers are signed. Ongoing legal support might be necessary to address any post-divorce issues related to your family business, such as modifications to the settlement, enforcing the terms of a buyout, or addressing issues related to business ownership and operations. Your lawyer can provide ongoing legal counsel and support to ensure that the terms of the divorce are honored and that any future disputes are handled effectively.

Protect Your Business Interests with Our Virginia Divorce Attorneys

At the Pack Law Group, we know what your family business means to you and we are prepared to go above and beyond to protect it. With decades of experience handling complex divorce cases in Virginia, we are aware of the challenges involved in safeguarding family business interests in a divorce. Whether your spouse has contributed to your family business or your business has commingled with your marital assets, we can assess the situation and develop a customized strategy to protect your ownership interest.

We can work with financial experts to obtain a fair and accurate valuation of your business, negotiate a buyout or settlement agreement to keep your business intact, and facilitate productive negotiations to avoid lengthy and costly court battles. From preserving your business’s stability to ensuring your financial future is secure, the Pack Law Group is committed to achieving the best possible outcome for you.

Don’t let divorce jeopardize the business you have worked so hard to build. Call us today at 540-586-7225 or contact us online to schedule a consultation with one of our seasoned Virginia divorce lawyers.