Domestic Relations / 05.16.2019

Divorce and the Family Business (Part 1 of 3): What Do You Own?

By John Ramsey

domestic relations

Most of us have been touched at some point in our lives by divorce. Often, this is a terribly chaotic experience for everyone involved. And this chaos can be easily magnified when there is a family business that is owned, in whole or in part, by one or both spouses.

In this three-part series, we will provide a basic introduction to divorce and its potential implications for the family business, including our insights on determining what you own, what the business interest is worth and how it is to be divided (if at all) in a divorce.

Identifying Ownership

In Ohio, courts must identify all assets, value those assets, and allocate them (or the value of them) to one or both spouses. This includes either spouse’s ownership interest in any business entity. Whether you or your spouse is an owner (shareholder) of Microsoft Corporation or a member of a small, family-owned business, the court must first determine what, exactly, is owned.

By way of comparison, if you or your spouse are a shareholder of Microsoft Corporation, identifying the ownership interest is usually pretty straight forward – just take a look at the owning spouse’s brokerage (or similar) statements to determine the number of shares owned.

But identifying the various ownership interests in privately held family businesses is often more complicated. Frequently, multiple family members are involved in the ownership, management and operation of the company. There may be a family legacy component to the business such that one or both spouses inherited or were gifted his/her ownership interest in the company.

Accordingly, identifying the ownership interest that either spouse has in a family-owned business can be challenging. Typically, it is not as simple as reviewing some brokerage account statements to see what is owned, as such statements usually do not even exist in this context. Instead, many of the fundamental company documents (e.g. membership agreements, shareholder agreements, buy-sell agreements, share ledgers, family trust documents, meeting minutes, etc.) must be produced to the opposing party and/or the court—and sometimes also to various experts—to initially determine what the spouse owns, whether the spouse is a majority or minority shareholder, how the ownership interest was acquired, when the interest was acquired and whether there are restrictions on the purchase or sale of that interest.

The First Step

Identifying what you own, is the fundamental first step to determining how much the business interest is worth as well as how (if at all) it will be divided in a divorce. It is also the first step in determining whether the business interest will be considered marital property or separate property by the court.

While we will discuss the distinction between “marital” and “separate” property in greater detail in subsequent articles, it is important to understand that Ohio law presumes that all property acquired during the marriage is marital property and subject to equitable (presumed equal) division between the spouses. Separate property, however, is typically retained solely by the owning spouse and not subject to division between the spouses.

Stay tuned for next week’s installment to learn more about determining what the business interest is worth.

KJK’s Domestic Relations & Family Law Practice Group can assist with all issues regarding divorce/dissolution, including issues pertaining to privately held (including family-owned) businesses. If you need assistance on these or other domestic relations matters, please contact John Ramsey at jdr@kjk.com or 216.736.7289.

 

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