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For many Maryland business owners, their company may be the most valuable asset they own. It may also be the primary source of the family’s income, the product of years of sacrifice, and something one spouse cannot imagine giving up. So when a marriage ends, the first question is usually some version of: Is my spouse going to get half my business?
The short answer is no, not in the way most people fear. A Maryland court will not split the company in two or make your spouse your new business partner. But if the business is marital property, its value can be a major factor in how marital assets are divided at the end of the case.
Maryland courts handle a business in a divorce the same way they handle any other property, in three steps:
Here is how each step works, and what you can do to protect yourself.
Under Maryland Family Law § 8-201, marital property is property acquired by either spouse during the marriage, no matter whose name is on it. A business started during the marriage is usually marital property, even if only one spouse ran it and the other never set foot in the office.
A business interest may be non-marital if it was:
Real life is rarely that clean. Suppose you started your company two years before the wedding, then spent ten years of the marriage building it with family money and family time. This may present a complex valuation question which requires the business owner to determine the value of the business as of the time they became married versus the present. The increase or difference in the value of the business at those two points in time may be considered the marital increase in the value of the business as a marital asset.
Once the court decides whether or not the business may be classified as a marital asset, the court must determine an appropriate value for the business. Obviously businesses vary widely in nature, size and complexity – some cases may involve a sole proprietorship where one spouse is the sole driver of business activity, while other cases may involve a more complex business structure where the spouse has multiple employees or business partners. The details of the business are incredibly important and affect how the business may be valued as a marital asset.
For ascertain the true value of a business, a party may need to hire a forensic accountant or certified business valuator. These are professionals who specialize in the valuation of businesses and can serve as an expert in your case. Your business valuation expert may prepare a report including their findings and testify in court if your case goes to trial. In practice, each spouse typically hires their own expert witness, and the judge decides which opinion is more credible.
The business valuation expert will want years of tax returns, financial statements, general ledgers, bank records, and the company’s governing documents. Expect the other side’s expert to scrutinize owner compensation, personal expenses paid by the company, and any recent dip in revenue that seems to coincide with the divorce.
Maryland is an equitable distribution state. That means “fair,” not automatically “50/50.” After classifying and valuing all marital property, the court may grant a monetary award under Family Law § 8-205 to adjust the equities between the spouses.
This is the point that surprises most business owners. In Maryland, the court can only transfer ownership of certain types of property from one spouse to the other. Md. Code Ann., Fam. Law § 8-205 states that the court can transfer ownership of retirement benefits, jointly owned real estate, and family-use personal property like the family home’s furnishings and cars – but not a spouse’s ownership interest in a business. The owner generally keeps the company, and the court accounts for its marital value through a monetary award.
Robert A. Greenberg, Esq is a dedicated, skilled family law attorney serving Maryland. Since 2015, he’s helped clients just like you understand how to approach asset division when a personal or family business is part of a divorce.
Have questions, or in need of legal representation? Interested in learning how to protect your business in light of a divorce? Reach out to Greenberg Legal Group LLC for an initial consultation today.
Section 8-205 lists the factors a judge must weigh, including:
These factors can be applied in a wide variety of ways. Since the court is limited in the types of property which it may transfer ownership of, the purpose of the monetary award “is to counterbalance any unfairness that may result from the actual distribution of property acquired during the marriage, strictly in accordance with its title.” Abdullahi v. Zanini, 241 Md. App. 372, 406–07, 211 A.3d 510, 530 (2019).
A monetary award does not have to come out of the business itself. It can be offset with other assets, such as the owner keeping the business while the other spouse keeps more of the home equity or retirement funds. The court can also order the award paid over time in installments. In a negotiated settlement, the parties have even more flexibility to structure payments around the business’s cash flow and tax consequences.
The business does not only matter as an asset. It is also the source of income used to calculate alimony and child support, and business-owner income is rarely as simple as a W-2.
For self-employed parents, Maryland’s child support guidelines start from gross receipts minus ordinary and necessary business expenses. However, calculating the true income figure of a self-employed individual is often a more complex question. Common issues include:
Those add-backs can significantly increase the income figure a court uses. These bottom-line income calculations can significantly impact how the court calculates alimony, child support and the overall division of the marital assets.
The best protection is put in place long before anyone talks about divorce. But it is never too late to start taking steps to protect yourself and your business.
Prenuptial and postnuptial agreements. A properly drafted agreement can classify a business, its future growth, and its income as non-marital. It is the single most effective tool a business owner has. Maryland enforces these agreements when they are entered into voluntarily, with honest financial disclosure, and on terms that are not unconscionable.
Operating and shareholder agreements. If you have co-owners, your LLC operating agreement or shareholder agreement should address what happens if an owner divorces. Buy-sell provisions and transfer restrictions can protect your partners and keep ownership out of a divorce court’s reach.
Keep business and personal finances separate. Pay yourself a documented salary or distribution. Do not run household bills through the company. If you contribute separate funds, keep records showing where the money came from.
Is a business started before marriage protected in a Maryland divorce?
Partly yes and partly no. The premarital value is generally non-marital. If marital funds or contributions went into the business during the marriage, part of its value may be marital.
Can a Maryland judge order me to sell my business?
No. A judge generally cannot transfer your business to your spouse or order it divided. Instead, the court instead decides whether a monetary award is justified and how it will be paid. In reality, a business owner may be forced to sell part or all of their interest in a business to fund a monetary award but it is unlikely that this would be the case if there are other marital assets involved.
My spouse owns the business. Am I entitled to anything?
If the business or part of it is marital property, its value is considered in deciding a monetary award, and your non-monetary contributions to the family count. Even if your name is not on the business documents, your contributions to the family unit as a whole are considered by the court. The business’s income also matters for alimony and child support.
Do we need a business valuation expert?
For most operating businesses, yes. Valuation is a technical, contested question, and an unsupported number rarely holds up in court. In some cases, both spouses agree to use a single neutral valuator to save cost.
The attorneys at Greenberg Legal Group work with both business owners and spouses of business owners who are going through divorce. We help our clients protect their most valuable assets while ensuring that they understand the significant financial ramifications of business ownership in divorce.
Call (410) 924-7717 or contact us online to schedule a consultation.
This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Every case depends on its own facts; consult a Maryland family law attorney about your situation.
