Is it possible or even advisable to keep the family business going after we divorce? How should we proceed?
Let’s use this example to answer your questions. Sally and Joe are local restaurant personalities. Even though they are divorcing, they both enjoy the business and Sally would like to remain co-owner with Joe, just as they were during their marriage. There are several notable “couples” who have run successful restaurants. The success rate isn’t
stellar – but it can be done with open, honest talk, and legal considerations.
But if Sally is divorcing Joe, how will they continue to work in a business when they couldn’t work things out in their marriage – especially since Joe is already voicing doubts?
If Sally really thinks they can work together, she and Joe need to make sure that they can communicate and work out issues relating to the business. They also need to leave the issues that caused the divorce at home. Can you picture patrons being treated to a round of bickering along with their flourless chocolate cake?
Then there is the question of finance. Sally is entitled to at least half of the value of the business if Joe keeps it and runs it himself. How will Joe pay Sally her share? Are there other assets available to give to Sally so that she gets her fair share of the marital assets? And if her restaurant income is taken away, Joe may find that he needs to give Sally maintenance for several years while she retrains for another job. If Sally is older, the maintenance may last longer since she may not be readily employable. The economics of the situation may cause Joe to rethink working together, especially if they can do it without tension.
They also need to talk to the restaurant staff. There are no secrets in life, and word will get around quickly that Sally and Joe’s marriage is on the rocks. The staff needs to know how an impending divorce is going to affect the operations of the business and their own positions. They can’t be kept in the dark once the divorce proceedings begin. If Sally and Joe don’t want to lose their chef and wait staff, they need to be open and honest with everyone.
Sally and Joe should have a professionally advised plan before they have their heart-to-heart talk with their staff. Just as they need a marital settlement agreement to deal with assets, support, and children’s issues, they need a business agreement that will be a framework for how the business is run.
Here are some of the areas that should be covered with Sally and Joe’s business professionals:
Business entity and tax filing. While married, Sally and Joe filed a joint return and the business was part of the return. Now that they are not married but are both owners, the business needs a formal arrangement for both tax and business reasons. The available choices are: partnership, corporation, or limited liability company. Which works best? A CPA and attorney need to put their heads together to work out the best arrangement for Sally and Joe.
Clear division of duties. There should be a written understanding of the division of duties: who handles the money, who makes the purchases, how to handle disagreements, and who handles the employees. If Sally and Joe can keep a business attitude at work, Joe’s qualms can be calmed.
Honest evaluation by the professionals. Sometimes, your CPA and attorney can tell you things your best friend can’t. They may have some important input into whether Sally and Joe can work together.
Careful, realistic planning can help Sally and Joe resolve their different goals. Not being realistic can sink more than a marital settlement: if both are not careful, the restaurant could also fall victim to their fighting over ownership issues.
Linda Forman, CPA, P.C., has practiced financial and tax guidance, retirement planning and ERISA issues, litigation support, and other areas of accounting in the Chicago area for over 30 years. She can be reached at (847) 316-1040. View her Divorce Magazine profile.