Divided we stand: when business owners divorce, what happens to the company?

Entrepreneur, May, 1998 by Steven C. Bahls, Jane Easter Bahls

At the same time, Wistner notes, the corporation might be getting a tax deduction by paying for the owners' house, utilities and vehicles. If the wife was drawing a salary, that's tax deductible, too. "When the owners divorce, all that ends," he says. "The husband loses all those tax deductions, and the sweetheart deal on the home front is over." Accordingly, personal expenses increase not only from the cost of setting up two households but from expenses formerly covered by the business.

When the business has additional partners - say, several brothers - things get even more complicated. A judge can order only the divorcing owner's share to be divided, not the share belonging to the other partners. But having to come up with the cash to buy out the owner's ex-spouse can strain relationships within the partnership.

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"A divorce is a substantial economic event even without a business," Friedman says. "The smartest [business owners] start with financial planners to figure out how this is going to work before they bring in the divorce lawyers." Sometimes, he says, the CPAs, business lawyers and divorce lawyers work together to forge the best possible agreement, then present it to the judge for approval. "The court doesn't have time to finely craft a solution," he notes.

It's easier when there's a partnership, shareholder's or LLC agreement in place ahead of time that includes formulas for how to value the business and how to arrange a buyout in the event of the death or withdrawal of an owner. The same goes for prenuptial agreements, which are more common these days. Most people contemplating marriage don't want to think about divorce, but a prenuptial agreement could save your business.

"Hire good lawyers," Herman advises. "Negotiate and resolve, and maybe you can avoid your business becoming a casualty of divorce."

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.