With an increase in the number of people who are choosing to operate home-based businesses, limited partnerships or simply operate their own business entity, each divorce lawyer must know how these businesses operate in order to provide proper legal advice to their clients who are involved in these enterprises but are no longer able to live together. The popularity of these entities complicates matters when a couple chooses to divorce because it creates the need to value those assets and determine how the court can distribute the profits fairly and equitably as part of the divorce settlement.
The make up of many home-based businesses include both active and passive income streams. The active income streams account for those activities in which the person had some active role in operating the business while passive might mean one of the partners had the entire responsibility of operating the business while the partner assumed marital responsibilities separate from the business. A divorce lawyer can help you understand any other sources of active and passive income that may exist within the home-based business you operate or are thinking of operating.
If you live in a community property state there are two steps that are necessary to determine the value of a home-based business. The first step involves assessing the value of the business when the couple first married or opened the business (whichever occurred later) as well as the value of the business at the time of the divorce. Once your divorce lawyer has these figures in front of him he will need to calculate the appreciation of both the active and passive business models during those time frames. This process is usually comprised of five steps as follows:
- Determine if the business entity in question falls under separate or marital property provisions.
- For any business individual parties to the divorce acquired before they married it is necessary to assess the value of that property before conducting an analysis on the appreciation in the active and passive sectors of the business.
- Assess the value of the business at the time of the divorce, separation or other date that is agreeable to the divorcing couple or assigned by the court. A formula that is often used though not necessarily. A rule of thumb is the business is worth three times more than the profits of the preceding year or five times the inventory.
- Calculate any changes that occurred in the asset during the time the couple was married; this is the figure you will need to use in order to determine the difference in valuation that occurred from the date of the marriage to the date or divorce or separation.
- Determine how much of the appreciation in the value of this non-marital property is active and how much is passive.
- Were there any factors that had a significant impact on the passive changes in the value of the business that the owner or manager could not control?
- How much of this change is the directly related to those external factors?
Always remember it is important to conduct a valuation of any business during the marriage and after divorce or separation in order to ascertain the most equal and equitable distribution of marital property and assets.