John McKindles, Mesa Attorney in Divorce and Business Ownership
The diversity of Mesa attorney John McKindles' legal practice, which
encompasses family law and complex business, real estate and tax matters,
provides a perspective on divorce and business ownership that frequently proves
valuable to John's family law clients, whether they are the business owner, the
spouse of the business owner, or an active co-owner.
Do you have a quick legal question?
Call John McKindles at 480-964-9302 for a
no-charge, five-minute phone call.
Frequently Asked Questions about Arizona Divorce
Answers to common questions about divorce, separation, health insurance, child
custody, child support, alimony, business ownership and more
The Divorce Plan
You can improve your prospects for a just outcome by committing to
the discipline of planning your divorce
The parties should try to agree that each spouse will receive certain community
assets, preferably in such a way that the value of the assets that go to one
spouse will be comparable to the value of the assets that go to the other
Debt Allocation A dizzying array of statutory and factual issues
can influence the determination of whether a debt is "separate" or "community"
Child Custody and Access
It pays, financially and emotionally, to have a well-structured plan for child
access issues as an alternative to an enduring legal nightmare that benefits no
Unlike other, less clearly defined issues that must be resolved in a divorce,
determining the child support obligation is a relatively objective process
An award of spousal maintenance (or "alimony") must pass a two-step test that is
set forth in Arizona law
Attorney’s Fees The awarding of attorney’s fees is so uncertain
that the possibility of “free” representation should not be a factor in deciding
whether to run up your legal bill.
Overview of Arizona
Divorce Principles in Bankruptcy
Excerpts from John McKindles' legal memorandum, “Overview
of Arizona Divorce Principles for Bankruptcy Practitioners”
Christians and Divorce
Christians who fear that ending their marriage would
conflict with God’s will should consider the Scriptural recognition that some
marital conditions are worse than divorce
Tips for Testifying in Depositions and in Court
In giving your sworn testimony, whether in a lawyer's office or in a courtroom,
observing some basic communication skills will reduce the risk of your spoken
words getting you into trouble.
When married couples divorce,
issues of property allocation can be among the most important and contentious,
particularly when business ownership is involved.
Most business-related divorce
disputes are fact-driven, and accurate facts are initially hard to come by,
often filtered by the parties’ perspectives, agendas and lack of data. However,
certain legal principles will likely apply to most circumstances illustrated by
the following two scenarios:
Business Owned Before Marriage
As a general rule, the business
that was owned by a divorcing person before marriage remains that
person’s separate asset after marriage (assuming that, during the
marriage, the owner did not affirmatively make his or her spouse a co-owner).
However, while it can be
relatively easy to establish ownership rights, it is less easy to allocate
increases in business value that occurred during the marriage.
Whether an increase in business
value is community or separate property often depends on the owner’s level of
involvement in the business. As a general principle:
business income and increased value earned by the
owner-spouse (i.e., through their active involvement in the business or the
“sweat of their brow”) during the marriage is generally community in
business income and increased value that are passive (e.g.,
an absentee owner who delegated operational control to a manger or co-owner)
generally remains separate in nature.
Stated another way, if during
marriage the business increased in value and the owner-spouse was actively
involved in the business, the increase in business value that occurred during
the marriage will generally be considered a community asset, with each spouse
entitled to half of the increased value.
On the other hand, if the
increase in business value is attributable, at least in part, to market or
economic factors outside of the owner-spouse’s efforts, or if the owner-spouse
was not actively involved in the business, at least some of the increase in
value would generally remain the owner’s separate asset and not be subject to
community property allocation.
Because the facts in both
scenarios can be subject to interpretation, business ownership in divorce often
involves the expert report and testimony of a business valuation professional,
and we work with some very good ones.
Both parties should be aware
that determinations of business ownership and value can have an impact on
spousal maintenance claims and awards. Because a spousal maintenance
determination is not based solely on community income, but generally considers
virtually all sources of income, a spouse who “won” on the business ownership
front may see his or her victory tempered by a corresponding “defeat” when
spousal maintenance is determined.
Business Started or Acquired During the Marriage
A business started during
marriage will generally be presumed to be community property. However, that
presumption can be overcome if the owner-spouse started the business with his or
her separate funds.
If the business or a partial
ownership interest is deemed to be community property, both spouses would
generally share an equal ownership of it.
A practical concern often arises
in cases involving a service-oriented business, in which the equipment,
inventory or personal property has relatively little value, and much of the
business’s value is derived from the reputation or “good will” of the
owner-spouse among customers, suppliers and prospects. A business valuation
might result in a relatively high value, based on the continuing active
involvement of the owner-spouse. Thus, in the negotiation of property
allocation, the possible removal of the owner-spouse from the business (even in
hypothetical terms) can be a major factor in depressing the business’s “real”
Consider this real-life example:
A few years ago, I represented the wife in a divorce. Both she and her husband
were successful realtors operating their community brokerage, but she was by far
the better producer and was responsible for the bulk of the couple’s income.
Husband’s business valuation
expert calculated an appraisal of over $300,000. Husband wanted to give the real
estate business to Wife in return for $150,000. Wife countered with an offer to
give the business to Husband in exchange for $10,000. Husband declined. (Since
no “non-compete” would be given, Wife could have set up her own realty business
the next day.)
The issue went to trial and the
Court awarded the business to the Wife with an equalization payment from her to
Husband of $20,000. This ruling was upheld on Husband’s appeal.
Moves and Counter-Moves
In some cases, the owner-spouse
might prepare the business for divorce by incrementally maximizing debt,
minimizing income and profit, and employing other methods to reduce the
appearance of business value. Consequently, the non-owner-spouse will want to
have access to as many business records as possible to help determine whether a
drop in business value is legitimate or orchestrated.
This is particularly important
if the business is largely service-oriented with only one of the spouses
operating the business. That type of business is more susceptible to unrecorded
cash transactions and to payment of personal expenses with business revenues.
The non-owner-spouse will want to document as many of these activities as
possible in order to flesh out these areas in the divorce litigation in an
effort to reach a legitimate value and an equitable determination.
Both parties should ask
questions and keep themselves fully apprised of each other’s business and
financial transactions, even when the prospect of divorce is not hovering
Complex business scenarios in
divorce might include:
multiple businesses owned by the couple;
the couple’s interest in a business that has other co-owners;
employment of either or both spouses in a business that is owned
by the couple;
the existence of shareholder’s agreements and operating agreements
that address exit strategies, buy-sell arrangements, business valuation in
divorce, and processes to be followed in each.
There are simply too many
possible variables to allow for further general comments here. Owner and
non-owner spouses must recognize that, while the division of business interests
might appear to be a “no-brainer” from their respective standpoints, the unique
circumstances involving length of ownership, the timing of business purchase or
formation, how the purchase or startup was capitalized, and many other factors
make business valuation in divorce largely dependent on the facts of each
situation and the needs and objectives of the spouses.