The Effects of Divorce on a Home-based Business

In today’s market, many individuals opt to open a home-based business, form a limited partnership, or enter private practice rather than working for someone else. But what happens if they you decide to divorce? Couples who own these types of businesses but can no longer live together would do well to consult a divorce lawyer with the expertise to advise them.

Many people have opened home-based businesses. But what happens when you decide to divorce? Those business assets can become real sticking points.

Who Determines the Value of a Home-based Business?

Home-based business assets can become sticking points in divorce. Before you file, you should learn how the courts might determine the value of those assets. It’s good to have some idea what the courts might consider equitable and fair as it relates to your business.

The various aspects of a home-based business require that you identify all types of existing active and passive income streams. An active income stream means you, the business owner, are actively involved in its operation. Passive income may derive from a partner who assumes additional marital duties to allow the primary owner the time necessary to operate the business.

Before you file for divorce, seek the legal advice of an attorney to reveal other types of passive and active income streams.

How to Assess the Value of a Home-based Business

Assessing the value of a home-based business with respect to community property and divorce requires two steps. First, determine the value of the business when the marriage occurred. Then assess the current value before the start of separation or divorce proceedings. Second, calculate and assign value to any appreciative changes to active and passive income streams during the same periods.

Use these five steps to assign values to active and passive income components:

  1. Determine the status of the business. Is it individual or marital property?
  2. Was the business acquired before the marriage? If so, you need to assess non-marital property value before any analysis of active and passive asset appreciation.
  3. Set a mutually acceptable or court-ordered date for assessing the value of the property—time of divorce, time of separation, or another date. A general assumption figures the worth of a business to be equal to three times the previous years profits, or five times the cost of inventory. Remember that this is not always the case.
  4. Calculate the worth of the divorce assets throughout the marriage. This determines the difference in valuation between the beginning of the marriage and start of divorce or separation.
  5. Determine how much non-marital property increased in value and whether the asset derives from active or passive income streams.

Outside Factors May Affect Profitability

Economic factors beyond the owners’ control sometimes impact the business’s profitability during the valuation process. This affects determination of profit or loss:

  • Which external factors significantly impacted changes in value of any passive assets of the business?
  • What percentage of this change in value resulted directly from those external factors?

Economic factors beyond the owners’ control sometimes impact the business’s profitability during the valuation process. This affects determination of profit or loss:

  • Which external factors significantly impacted changes in value of any passive assets of the business?
  • What percentage of this change in value resulted directly from those external factors?

Determining the value of any home-based business contributions made before and after marriage makes it easier to assess equal distribution of the non-marital assets in divorce proceedings.

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