Divorce is often legally complex as well as an emotional strain. While the process may be straightforward for divorcing spouses who don’t own property and have few marital assets, it becomes increasingly challenging when spouses have more extensive financial portfolios, including when one or both spouses own businesses.
Although no one begins their marriage planning to divorce, sometimes life takes spouses on different paths, making divorce the inevitable conclusion. If you own a business, you’ve likely put your heart and soul into it. How does a divorcing spouse protect their business during the divorce process in Colorado?
Understanding the Equitable Division of Assets and Separate or Marital Property In Colorado
Colorado is not a community property state with strict 50/50 division laws during divorce. Instead, Colorado requires the “fair and equitable” division of marital assets, not necessarily an exact 50/50 division.
Under this law, spouses retain separate assets, such as property and assets belonging solely to one spouse before the marriage, those gifted to them during the marriage, or property inherited by them during the marriage. In contrast, all accounts, assets, and property acquired during the marriage must be fairly divided between divorcing spouses, regardless of whose name is on the account, deed, or title.
This applies to any businesses owned by one or both spouses when the business was started during the marriage or maintained and improved during the marriage.
Without protections in place or a strong legal strategy to safeguard a business during divorce, the court may require a business owner to give their spouse half of the business’s value, sell the business and split the profit with their spouse, or continue sharing the business with an ex-spouse.
How Commingling Assets Impacts Business Ownership During a Divorce
While determining separate vs. marital assets seems straightforward, the commingling of separate assets is common during marriage, potentially giving one spouse the right to claim a portion of the other spouse’s separate assets, including a business begun before the marriage.
For example, one spouse may have begun a business before the marriage, making it their separate property, but once married, if the other spouse has access to business accounts or spends their time, talent, or money improving the business, they have a right to claim half of the business’s improved value during the divorce.
Protecting a Business Before the Marriage
The best way to protect your business during a divorce is to put the protections in place before the marriage, or early in the marriage, before commingling occurs. Several strategies can protect a spouse’s business against the possibility of a future divorce, including the following:
- A prenuptial agreement, signed before the marriage, ensures that one or both spouses’ separate businesses have protection and remain their separate assets
- A post-nuptial agreement, signed when one spouse opens a business during the marriage or seeks protection for an existing business to maintain its status as a separate asset
- Not using marital funds to start, maintain, or improve the business
- Ensuring that one spouse’s business remains separate by preventing comingling with the other spouse, such as ensuring that the other spouse does not invest money, time, or talent into the business, and does not have access to business accounts
A skilled family attorney in Denver can advise a business owner before the marriage on how to protect their business and other assets against a future divorce.
Protecting a Business During a Divorce In Colorado
If you did not put a pre-nuptial or post-nuptial agreement in place to keep a business as a separate asset, there are still ways to protect your business during a divorce or to minimize the other spouse’s portion of the assets during the division and distribution of marital assets in the divorce process.
First, a thorough valuation of the business, performed by a financial expert or forensic accountant, is necessary to determine its total worth. Some strategies used to protect one spouse’s business during a divorce in Colorado include the following:
- Because Colorado demands a fair and equitable distribution of marital assets, a business owner could offer a fair exchange for their spouse’s portion of the business’s value. For example, if the other spouse wishes to keep the home and other assets, such as a vacation home, rental properties, cars, or other investment or retirement accounts, the business-owning spouse may offer a “trade” of equal value by exchanging their claim for a portion of the asset for their spouse’s portion of the business.
- The business owner could set up a payment plan in exchange for their spouse’s share of the business
- Some spouses agree to pay alimony to the other spouse in exchange for their share of the business
- One spouse can buy out the other spouse’s share of the business
- Spouses who can agree to communicate and compromise may agree to continue running the business together until they decide that it’s time to sell or dissolve the business
It can be challenging to protect against a spouse’s claim to a share of the business. If spouses cannot agree on a fair exchange or another alternative, the case goes to court for a judge to resolve the matter through the contested divorce process.
What Does the Court Consider When Determining The Division of a Business During a Colorado Divorce?
During a divorce involving a dispute over a business, both spouses typically have separate valuations performed, often leading to discrepancies in the assessed values, depending on the method each forensic accountant used to value the business. When a case comes before a judge, the Colorado Divorce Court considers the following:
- Each spouse’s assessment of the business’s value
- When the business was started
- Whether a spouse invested money or contributed time, talent, or labor to improve the business’s value
- Whether marital funds were used in the creation or maintenance of the business
- How much the business increased in value during the marriage
In some cases, a spouse may have a strong case for claiming a share of the other spouse’s business based on other factors. For instance, if one spouse supported the other during their education and that support enabled the other to start a business, a judge is likely to determine that they are entitled to a fair share.
Or, if one spouse took on more than their fair share of managing the household and caring for the children to support their spouse’s business endeavors, especially if it was to the detriment of their own career opportunities. Contact our family lawyers to discuss your case today with Ciancio Cianco Brown, P.C.