Running a successful small business or professional practice often requires a significant commitment of time and capital. Revenue at businesses can fluctuate, even when organizations are relatively successful. Expenses can spike unexpectedly due to changes in the economy, making financial flexibility crucial for successful business operations.
Many businesses use loans to cover startup expenses. They may also have revolving lines of credit that allow them to pay workers or acquire supplies during times when revenue drops. If the owner of a small business or professional practice faces divorce, they may have to divide the equity in the business with their spouse. Business debts can also factor into the property division process.
How do organizational obligations influence property division proceedings?
Debt affects business value
Frequently, businesses and professional practices are at least partially marital property. Spouses have to determine what they are worth and then factor that into the allocation of marital property and financial responsibilities. Usually, addressing a business as part of the marital estate requires establishing a clear valuation for the company.
Valuation calculations look at details ranging from current and likely future revenue to the value of business resources. Any financial obligations owed by the business can also factor into the overall value of the company. Large debts related to the acquisition of machinery or regular operating costs can significantly reduce the current valuation of the company.
While the debts themselves may not technically be part of the marital estate because the business is responsible for covering those debts, the value of the organization can shift substantially because of significant organizational debts. The less the company is ultimately worth, the less equity the spouses have to account for when allocating other assets to balance out the business’s value during the property division process.
Business debts can also reduce how much income one spouse derives from future company revenue, as they have to dedicate earnings toward fulfilling financial obligations. Organizational debts could affect both property division proceedings and requests for spousal support or alimony. The overall value of the business, the extent of its debt and the valuation model used can all play a role in determining how much the debt owed by the business affects the outcome of a divorce.
Spouses who own small businesses or who are married to someone who runs one may need help addressing the complex financial issues that may arise during their divorce. Recognizing that business debts can impact divorce outcomes may help people strategize as they prepare for divorce proceedings.