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Community Interest in a Sole and Separate Business

When it comes to divorce, one of the first questions that is often asked is, “what will happen to my business?” Navigating divorce can be stressful and tricky, especially when your business - something you’ve poured yourself, blood, sweat and tears as well as your finances into - is at risk.

Arizona is a community property state, which means that property acquired during the marriage is deemed community property, and that property acquired prior to the marriage is sole and separate property. Although results are always determined on a case-by-case basis, knowing when the business began operation can give insight to possible outcomes for the division of the business.

  • Did the business start while you were married?
    • Any business income generated from efforts during a marriage is considered community property, even if they were earned by only one spouse.
    • There is a high likelihood that the value, usually as determined by an appropriate expert, of the business will be equally divided as a community asset.
  • Did the business start prior to marriage?
    • A business started prior to marriage is considered sole and separate until the date of the marriage, at which point, based on the actions of the parties, it can transform into community property.
    • Business income, profits, and appreciation in value generated from the efforts of the participating spouse during a marriage is considered community property and there will be a community interest or lien against said amounts.
    • If the spouse did not work at building the business during the marriage with labor or money contributions, and simply has a passive investment-type of ownership interest, then the business, its profits and any appreciation in value will likely remain that spouse’s sole and separate property.

It is important to note that courts typically do not order the business or its inventory actually physically divided or order the actual liquidation and sale of the business – rather the business or the portion of the business owned by the parties or one spouse will be valued as a whole, typically by an appropriate business valuation expert, and that value will be divided with the spouse retaining ownership and operation of the business liable to pay the other spouse their share of that value either by offsetting it against other assets being divided in the divorce or as a judgment.

If you’re looking at divorce and you’re a business owner, or your spouse is a business owner, contact the attorneys at OWENS & PERKINS by clicking here or by calling our office at 480.630.2464 to schedule your FREE 30-minute consultation.

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