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Divorce  •  Financial Challenges  •  Real Estate  •  Estate Controversy  •  Business Law

 

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John McKindles, Mesa Attorney in Divorce and Business Ownership

The diversity of Mesa attorney John McKindles' legal practice, which encompasses family law and complex business, real estate and tax matters, provides a perspective on divorce and business ownership that frequently proves valuable to John's family law clients, whether they are the business owner, the spouse of the business owner, or an active co-owner.

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Mesa Arizona Divorce Attorney

Frequently Asked Questions about Arizona Divorce Answers to common questions about divorce, separation, health insurance, child custody, child support, alimony, business ownership and more

The Divorce Plan  You can improve your prospects for a just outcome by committing to the discipline of planning your divorce

Asset Distribution  The parties should try to agree that each spouse will receive certain community assets, preferably in such a way that the value of the assets that go to one spouse will be comparable to the value of the assets that go to the other

Debt Allocation  A dizzying array of statutory and factual issues can influence the determination of whether a debt is "separate" or "community"

Child Custody and Access  It pays, financially and emotionally, to have a well-structured plan for child access issues as an alternative to an enduring legal nightmare that benefits no one

Child Support  Unlike other, less clearly defined issues that must be resolved in a divorce, determining the child support obligation is a relatively objective process

Spousal Maintenance  An award of spousal maintenance (or "alimony") must pass a two-step test that is set forth in Arizona law

Awards of Attorney’s Fees  The awarding of attorney’s fees is so uncertain that the possibility of “free” representation should not be a factor in deciding whether to run up your legal bill.

Overview of Arizona Divorce Principles in Bankruptcy  Excerpts from John McKindles' legal memorandum, “Overview of Arizona Divorce Principles for Bankruptcy Practitioners”

Christians and Divorce  Christians who fear that ending their marriage would conflict with God’s will should consider the Scriptural recognition that some marital conditions are worse than divorce

Tips for Testifying in Depositions and in Court  In giving your sworn testimony, whether in a lawyer's office or in a courtroom, observing some basic communication skills will reduce the risk of your spoken words getting you into trouble.

 

 

Avvo Mesa AZ Business Attorney

When married couples divorce, issues of property allocation can be among the most important and contentious, particularly when business ownership is involved.

Most business-related divorce disputes are fact-driven, and accurate facts are initially hard to come by, often filtered by the parties’ perspectives, agendas and lack of data. However, certain legal principles will likely apply to most circumstances illustrated by the following two scenarios:

  • the business was owned by one of the spouses before they got married; and

  • the business was started or acquired while they were married.

Business Owned Before Marriage

As a general rule, the business that was owned by a divorcing person before marriage remains that person’s separate asset after marriage (assuming that, during the marriage, the owner did not affirmatively make his or her spouse a co-owner).

However, while it can be relatively easy to establish ownership rights, it is less easy to allocate increases in business value that occurred during the marriage.

Whether an increase in business value is community or separate property often depends on the owner’s level of involvement in the business. As a general principle:

  • business income and increased value earned by the owner-spouse (i.e., through their active involvement in the business or the “sweat of their brow”) during the marriage is generally community in nature, and

  • business income and increased value that are passive (e.g., an absentee owner who delegated operational control to a manger or co-owner) generally remains separate in nature.

Stated another way, if during marriage the business increased in value and the owner-spouse was actively involved in the business, the increase in business value that occurred during the marriage will generally be considered a community asset, with each spouse entitled to half of the increased value.

On the other hand, if the increase in business value is attributable, at least in part, to market or economic factors outside of the owner-spouse’s efforts, or if the owner-spouse was not actively involved in the business, at least some of the increase in value would generally remain the owner’s separate asset and not be subject to community property allocation.

Because the facts in both scenarios can be subject to interpretation, business ownership in divorce often involves the expert report and testimony of a business valuation professional, and we work with some very good ones.

Both parties should be aware that determinations of business ownership and value can have an impact on spousal maintenance claims and awards. Because a spousal maintenance determination is not based solely on community income, but generally considers virtually all sources of income, a spouse who “won” on the business ownership front may see his or her victory tempered by a corresponding “defeat” when spousal maintenance is determined.

Business Started or Acquired During the Marriage

A business started during marriage will generally be presumed to be community property. However, that presumption can be overcome if the owner-spouse started the business with his or her separate funds.

If the business or a partial ownership interest is deemed to be community property, both spouses would generally share an equal ownership of it.

A practical concern often arises in cases involving a service-oriented business, in which the equipment, inventory or personal property has relatively little value, and much of the business’s value is derived from the reputation or “good will” of the owner-spouse among customers, suppliers and prospects. A business valuation might result in a relatively high value, based on the continuing active involvement of the owner-spouse. Thus, in the negotiation of property allocation, the possible removal of the owner-spouse from the business (even in hypothetical terms) can be a major factor in depressing the business’s “real” value.

Consider this real-life example: A few years ago, I represented the wife in a divorce. Both she and her husband were successful realtors operating their community brokerage, but she was by far the better producer and was responsible for the bulk of the couple’s income.

Husband’s business valuation expert calculated an appraisal of over $300,000. Husband wanted to give the real estate business to Wife in return for $150,000. Wife countered with an offer to give the business to Husband in exchange for $10,000.  Husband declined. (Since no “non-compete” would be given, Wife could have set up her own realty business the next day.)

The issue went to trial and the Court awarded the business to the Wife with an equalization payment from her to Husband of $20,000. This ruling was upheld on Husband’s appeal.

Moves and Counter-Moves

In some cases, the owner-spouse might prepare the business for divorce by incrementally maximizing debt, minimizing income and profit, and employing other methods to reduce the appearance of business value. Consequently, the non-owner-spouse will want to have access to as many business records as possible to help determine whether a drop in business value is legitimate or orchestrated.

This is particularly important if the business is largely service-oriented with only one of the spouses operating the business. That type of business is more susceptible to unrecorded cash transactions and to payment of personal expenses with business revenues. The non-owner-spouse will want to document as many of these activities as possible in order to flesh out these areas in the divorce litigation in an effort to reach a legitimate value and an equitable determination.

Both parties should ask questions and keep themselves fully apprised of each other’s business and financial transactions, even when the prospect of divorce is not hovering overhead.

Other Issues

Complex business scenarios in divorce might include:

  • multiple businesses owned by the couple;

  • the couple’s interest in a business that has other co-owners;

  • employment of either or both spouses in a business that is owned by the couple;

  • the existence of shareholder’s agreements and operating agreements that address exit strategies, buy-sell arrangements, business valuation in divorce, and processes to be followed in each.

There are simply too many possible variables to allow for further general comments here. Owner and non-owner spouses must recognize that, while the division of business interests might appear to be a “no-brainer” from their respective standpoints, the unique circumstances involving length of ownership, the timing of business purchase or formation, how the purchase or startup was capitalized, and many other factors make business valuation in divorce largely dependent on the facts of each situation and the needs and objectives of the spouses.