If your business is a partnership you and any other partners share ownership and responsibilities for running your company. Ideally you should have a well drafted partnership agreement that covers any number of potential issues the partners may face. One issue that may or may not be covered is what happens to a partner's interest in case he or she gets divorced.
Pennsylvania is an equitable distribution state. That means that in the course of a divorce a spouse may claim partial ownership of assets owned by a spouse or the appreciation in value of the assets over the course of the marriage, depending on the circumstances. There are several factors that go into a judge deciding what would be equitable share of the asset for a spouse. They include how much time, effort and sacrifice one spouse put into helping the other spouse run a business. The bigger the role the spouse played the larger the share of the business the spouse might get.
There are many ways this could settle:
The other spouse may not be interested in a share of the business,
Your partner may buy out his or her spouse with that person agreeing not to pursue an interest in the business in exchange for money or other assets (such as a home),
The two may have a binding prenuptial agreement spelling out how to handle who gets what for what share of the business ownership,
If the divorcing spouses can't reach an agreement and there's no binding prenuptial agreement it would be up to a judge to decide what share, if any, of the business partnership the spouse should get.
Divorces are rarely a surprise. If your partner believes a marriage is coming to an end you could buy out your partner's interest. That partner and his or her spouse would have to work out who gets how big a share of the proceeds.
If the ex-spouse becomes part of the business it could impact your business in different ways:
If there are three partners with equal shares of the business, your partnership agreement states each partner's power to run the business is based on how much of the business he or she owns and the ex-spouse gets part of a share through the divorce, this new partner has a minority share and diluted voting power. If two or three of the original partners agree to a course of action, they will carry the day.
A partner can bind the partnership and create liability for it. Your new, uninvited and potentially spiteful partner may start making decisions impacting you and the business.
If you and/or your partner does not have the cash to buy out the spouse, he/she could sell their share to an outsider.
In certain situations your divorcing partner will need to sell his/her share just to pay out the spouse.
Often in these situations given how volatile it can be if divorced spouses own a share of a business the best outcome may be that the other partners buy out one, if not both, of the unhappy couple and everyone goes their separate ways.
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If you are a partner in a business and another partner is going through a divorce, contact us if you have any questions about how this could impact you, your legal rights and your interests. We can help you work out any disputes this may cause between the partners or represent your interests in case such a situation results in legal actions between partners.