Methods of dividing a business in divorce

A married couple that owns and operates a successful Maryland business typically puts in long hours of difficult work. A divorce ends not only their marriage, but it can put an end to the business they worked so hard on.

In a divorce that involves co-ownership of a business, with each owning 50 percent of the enterprise, the American Bar Association says there are in general three options for determining what will happen to the business after the end of the marriage:

  • One spouse buys out the other
  • The business is sold
  • Though divorced, the pair remains co-owners

Let’s take a look at each of those options.

One buys out the other

This is the most common resolution to the problem of dealing with co-ownership of a business in divorce: one spouse buys the other spouse’s interest in the business.

This method has an important tax consideration, the ABA says: “A spouse’s purchase of a business interest from the other spouse as part of a buyout typically is not treated as a sale for tax purposes.” The transfers of money from one spouse to the other and half of ownership interests from one to the other are typically considered tax-free.

There are two ways for the transfers to be considered part of the divorce and therefore tax-free: (1) if the transfers happen within a year after the marriage ends, and (2), if the property division settlement requires it and the transfer then happens within six years after the end of the marriage.

No matter which of the options divorcing business owners decide on to split their business interests, it’s important to discuss the matter with a family law attorney and a financial advisor.

We will have more on those options in an upcoming post to our Bethesda family law blog. Please check back.