What Small Business Owners in Minnesota Should Know About Divorce

Getting a divorce in Minnesota requires a person to take inventory of their entire life, including the property they own, their income, their relationship with their child(ren), and more. A court cannot grant divorce until the judge is satisfied that all major issues, from child custody to property division, have been resolved as much as possible. For small business owners, divorce can bring an additional set of challenges. Some or all of the equity in the business could be considered marital property. That means the court could order it divided between the spouses. What does this mean for the business owner, and the business itself? It depends on numerous factors, including how the business is organized, when the business was started, and what each spouse contributed to the business.

Please note that this post assumes that only one spouse owns all or part of a small business. If the spouses are also business partners, much of this information will apply, but there will be other concerns as well.

Equitable Distribution of Marital Property

Under Minnesota law, most property acquired by either spouse during a marriage is considered “marital property.” Property received as a gift or through inheritance is not marital property, even if it occurs during the marriage. A car, for example, would not be considered marital property if one spouse:

• Owned it before getting married;
• Received it as a gift;
• Inherited it from someone who left the car to them in their will; or
• Purchased it using only money received as a gift or as inheritance.

If the spouse buys the car during the marriage, with money they earned at their job, then the car is marital property.

Minnesota law requires “equitable division” of marital property, “without regard to marital misconduct.” If a court must decide how to divide marital property, state law directs the court to consider factors like:

• Each spouse’s income, education, marketable skills, and employment prospects;
• The length of the marriage;
• The spouses’ ages and health;
• Each spouse’s contribution to “the acquisition, preservation, depreciation or appreciation” of the marital property; and
• “The contribution of a spouse as a homemaker.”

In the context of small business ownership, the support offered to a business owner spouse by a non-business-owner spouse is definitely a factor courts will consider. Suppose one spouse works a full-time job while the other spouse starts a business. The business takes some time to become profitable, and during that time, the non-owner spouse is the only one with a regular income. The support offered by the spouse who kept their job is an important factor in the business’ eventual success.

What Parts of a Small Business Are Considered Marital Property?

Business ownership can take several forms. The first question to ask is whether a business has a formal legal structure under Minnesota law, such as a corporation or a limited liability company (LLC). A business that lacks a formal legal structure is commonly known as a “sole proprietorship” if it only has one owner, or a “partnership” if it has multiple owners.

Business “Entities”

To understand exactly what a business owner “owns,” one must first understand how the law views businesses as distinct entities, separate from their owners. This can be confusing. The way lawyers and legislators write might offer a way to understand it. Many statutes use the word “person” to refer to more than just individual people. Under federal law, for example, the word “person” could also mean “corporations, companies, associations, firms, partnerships, societies, and joint stock companies.”

What does all this mean? In a divorce involving a small business, marital property includes some part of the business entity. It does not include specific assets owned by the business. If, for example, a spouse owns a small business, and the business owns a car, the business might be marital property, but the car is not.

“Ownership” of a Business

What, exactly, does a business owner “own”? This depends on the structure of the business. Without a formal structure, ownership is mostly a matter of percentage. If a spouse operates a business as a sole proprietorship, they own 100% of their business. If a spouse is a partner in a partnership, they own a percentage of the business based on their agreement with their partners.

Ownership of a corporation consists of “shares,” also known as “stock.” Owners are known as “shareholders.” A person who is the sole shareholder of a corporation might still express their ownership as “[X] shares of stock.”

LLC owners are known as “members.” Minnesota law does not have a specific term like “share” to indicate LLC ownership. Members may identify their ownership as a percentage of the company, or in units of membership similar to shares.

Business Valuation

An equitable division of marital property does not have to be based on the value of the marital assets. Determining the value of major assets is still often a major factor in a divorce case. The three most common methods for determining a business’ value are:

• Income: Past and current revenue, and possibly projected future earnings;
• Assets: Total value of business assets, minus total business liabilities; or
• Market Value: Sales prices of similar businesses under similar circumstances, if possible.

Dividing Ownership Interests in Divorce

Once the spouses have found a way to characterize ownership of the business, and have determined a value, what are their options in terms of property division?

1. Lump-Sum Buyout

This is often the simplest solution, although it might require a substantial sum of money. The parties might arrive at an agreed valuation of $150,000, and they determine that the non-owner spouse should receive, say, one-third of the value. The business owner buys out their interest in the business for $50,000, and they go their separate ways.

2. Long-Term Buyout

If the business owner spouse cannot come up with the entire buyout amount, they might agree to paying it out over time. In the above example, they might agree to a five-year payment plan, with or without interest.

3. Business Partners

Suppose a business owner spouse owns one thousand shares of a corporation, and they are the sole shareholder. They determine that their spouse should receive forty percent of the business. The non-business-owner spouse would then own four hundred of the one thousand shares of the corporation, and would get to have a say in business operations. This is usually not an advisable option, for fairly obvious reasons.

3a. Special Rule for Professional Businesses

For some types of businesses, a buyout is the only legal option. People who own businesses engaged in certain professions, such as medical or dental practices, law firms, accounting firms, veterinary practices, and others may be required to organize their business as a “professional firm.” Minnesota restricts ownership of a professional firm to people who are licensed in that particular profession. Only doctors may own medical practices, and only architects may own architecture firms.

If one spouse is a licensed veterinarian and owns a veterinary practice, and their spouse is not a veterinarian, they cannot co-own the business. A buyout might be their only option.

St. Cloud, Minnesota family lawyer Anthony Toepfer represents people during uniquely difficult times in their lives. He handles a wide range of family law matters, including divorces with complicated property division issues. As a client of Toepfer at Law, you will always have access to up-to-date information about your case, and we are always available to discuss your case with you if you have questions. Please contact us through our website, or give us a call at (320) 497-4416 today to schedule a confidential consultation to see how we can help you.