“My spouse and I were wondering if we can still be co-owners of our small business after the divorce? Neither of us really wants to sell it.”
Although it is possible for you and your spouse to remain co-owners of a business after your divorce, I would not recommend it. Divorce can adversely affect the success of your business partnership due to many legal, financial, and emotional factors. However, if you do decide to keep the business, you must determine who will take legal control and have the ultimate say-so in the decision-making process.
When you co-own a small business with your spouse, you together own a 100% interest in the company and are entitled to an equal possession in joint tenancy. Hence, neither person can transfer his or her interest to a third party without dual consent. Joint tenancy also affords the right of survivorship on the death of one of the owners.
However, after a divorce, your business title through proper deeding may change to a tenancy in common, in which each owner may hold a different level of interest in the company. Although this change is not automatic, with proper agreements in place, tenants-in-common owners may sell or transfer their fractional business interests without the consent of their ex-spouses. This presents the legal and financial need to establish proper ownership. Depending upon the liability structure in place with various vendors, your ex-spouse may have the legal control over the business, but both may be jointly and severally obligated for 100% of the liabilities. If your ex-spouse is not financially stable, you might be required to cover all business losses, which may be financially devastating. In addition, remarriage and survivorship issues can complicate ownership rights and create costly legal hassles.
Although you might find it possible for you and your spouse to remain co-owners of a business after your divorce because you remain on good terms, emotional distress may negatively transfer into everyday business operations. Therefore, while the forced sale of assets can lead to less cash realized, a potential loss on real estate, and an unavoidable payment on capital gains, the financial and emotional risks of co-owning a business after a divorce are still a great deal higher.
Gary DeClark is the managing director of Integra Realty Resources – Chicago (IRR), the nation’s largest commercial real estate valuation and counseling firm. IRR helps people meet their individualized valuation needs quickly and effectively.