Why Closely-Held Businesses Complicate Divorces in Maryland and D.C.

business woman surrounded by financial symbols; business/finance concept

The Maryland and D.C. family law attorneys at The Law Offices of Thomas Stahl explain how divorces in Maryland and the District of Columbia involving closely held businesses are complicated ones. There are several reasons why.

First, businesses are generally high-value assets in a divorce, and all assets owned by the couple are subject to equitable division during a divorce proceeding. Given its high value, there is almost always an enormous fight over whether the business is a marital asset AND overvaluation. A business can be deemed non-marital if it was started and owned by one spouse prior to the marriage. However, there are complicating factors like whether marital monies were invested into the business during the marriage and whether the business appreciated in value during the marriage. That increase in value can be deemed marital property aside from the business itself. Valuation is often hotly disputed, which can result in lengthening the divorce and significantly increasing its costs.

Second, the business may have been the main source of income for the couple during the marriage and may be the main source of income, alimony, and child support after the divorce. As such, there is a need for careful attention to how the business is allocated during the equitable distribution so as not to “kill the golden goose.”

Third, at the same time, spouses can have very high emotional investments in their businesses, which can generate extreme reactions if there is any danger that part of the business will be lost during the divorce. Strong emotional attachments can lead to vindictive behavior on the part of the other spouse if the divorce is bitter and hostile. This dynamic can be particularly “bad” if the ex-spouse will be able to exercise some sort of control over the business if the business is split by the Maryland/D.C. divorce court. Nobody wants to have an ex-spouse on the board of directors/managers of their company.

Another complicating factor is whether there is an Owners’ Agreement that references what happens to ownership units in the event of a divorce. Many closely-held businesses have such agreements where the owners have identified how ownership of the business is impacted by events like the death, incapacitation, or divorce of an owner. In some agreements, owners involved in a divorce may be forced to sell their ownership units. The general purpose of such a requirement is to prevent some unknown heir, ex-spouse, or other person — who may be unqualified and potentially hostile — from becoming part of the management team of the business.

“Swapping” is often the solution

Unless the spouses are committed to a vindictive-burn-it-to-the-ground divorce, often the best solution with respect to handling a business during a divorce is to engage in asset “swapping” or “trading.” After the question of valuation is resolved, the couple agrees that ownership of the business will not be split. This avoids the problem of an ex-spouse being part of management and will generally avoid any contractual problems with the other owners. The method is to “swap” or “trade” the value of the business ownership unit against the value of other marital assets. As a simple example, one spouse “gets the house,” and the other “gets the business.”

Maryland And D.C. Family Law Attorneys

Contact the seasoned and experienced Maryland and D.C. family law lawyers at The Law Offices of Thomas Stahl for more information. We have the skills and expertise you need. We have proven experience with family law for Maryland and the District of Columbia. Schedule a consultation today or call us at (410) 696-4326 or (202) 964-7280. We have offices in Columbia, MD, and Washington, DC.

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