If you own a business – or plan to in the near future – it is important to know how your business interests may be impacted by marriage or divorce.
Arizona is a community property state. Businesses started during marriage are considered community property. Regardless of whether the business was started before or during marriage, increases in its value during marriage are considered community property.
This surprises many. It’s not uncommon for people to view their careers and home life as completely separate. Many professionals or skilled tradespersons have the dream of owning their own business but it doesn’t become a reality until a bit later in life. Marriage, kids and other big family events may precede business ownership.
We use a fictional character, Karen, as an example.
Karen is artistically gifted and good with people. As a young adult, she became a highly successful tattoo artist at one of Phoenix’s largest parlors. Although she was happy, she always dreamed of opening up her own shop someday. Wisely, she began saving money for her dream.
Karen met the love of her life – or so she thought – and they married. Her spouse had a steady job and made roughly the same income. They both lived within their means and rarely considered big purchases. They used most of their disposable income to travel the world.
Years later, Karen’s dream became a reality. The perfect business location became available and Karen had saved enough over the years to open her own upscale parlor. After a tough first year, her business became successful and Karen began making more money than she ever had before. She reinvested much of it into her business.
Despite great career success, her home life was not doing well and her marriage was irreparable. When Karen met with her divorce attorney, she was shocked to learn that her business was community property, or marital property. She now fears that her divorcing spouse will want to keep half the ownership interest in her business rather than letting her “buy out” his interest.
What could Karen have done to give her more control over her business?
She could have worked out a premarital contract, or prenuptial contract, with her partner before getting married. These agreements are soaring in popularity because they allow marrying people to have certainty about important things in live – such as a business – even if divorce occurs.
Hopefully, with the help of her divorce lawyer, Karen is able to reach a reasonable divorce agreement that allows her to move on with her life and career. If she marries again, she knows she will only do so with a premarital agreement in place that ensures she will retain exclusive ownership of her business.