Photo by Adeolu Eletu on Unsplash

Anytime I meet with anyone who is self-employed, a small business owner or works for a family business and that person is considering marriage, I can't advise them strongly enough to get a prenuptial to protect the business and their interest in the business.  The problem for small business owners is that the divorce courts in Michigan will consider your spouse to own half of whatever your share of the business may be.  So if you are a fifty percent owner, then your wife is really a twenty-five percent owner and you are a twenty-five percent owner.  This mean that in order to keep the business that you and/or your family has built with your own blood, sweat and tears after the divorce, you will have to pay out to your ex-spouse half of the appraised value of your share of the business, as well as roughly half of all of your other assets and potential alimony as well.  Further, in divorce or family law cases, businesses are typically appraised using the "holder's method" of appraisal which means that the business is often appraised at a higher value than you could possible sell it for on the open market to an arms length buyer.. 

In 2024 the Michigan Legislature in its infinite wisdom enacted several new statutes regarding family law and one of these statutes makes divorce for the small business owner even more difficult  This blog is written to broadly address issues business owners face in divorce, how those issues have been further impacted by this new legislation and why a prenuptial agreement is absolutely essential for a business owner who is getting married.  If you are a business owner or you are involved in a family business and are considering marriage, separation or divorce, please do not hesitate to contact us to schedule a consultation by clicking on this link or by calling us at (248) 608-4123, to discuss a prenuptial agreement or how a divorce may impact your family business and you.

How The New Legislation Makes Divorce Even More Difficult For A Business Owner.

As indicated above, if you are self-employed, a small business owner or work for a family business in Michigan, it is essential to get a prenuptial agreement prior to your marriage to protect your family and your business.  The new legislation that was enacted in 2024 creates additional problems and it is directed at earnings that are held in the business bank account.  It addresses how those earnings are characterized for the purposes of divorce in Michigan. 

Formerly, earnings held in the bank account of a family business were considered a part of the business and could potentially be used to help calculate the value of the business but then it could not be used to determine the business owner's income for the purposes of child support and alimony.  In addition, it was the burden of the non-owner to prove that earnings held in the business account were not essential for the operation of the business, if the non-owner could not prove this, then those "additional earnings" in the bank account could not be used to increase the actual appraised value of the business or included in the income of the business owner for the purposes of alimony or child support.  The new legislation has switched the burden of proof to the business owner to show that the earnings held in the account are essential for operating costs, failure to be able to prove this by the business owner can lead to negative consequences for them. 

The small business owner in a divorce is already required to provide a massive amount of paperwork and information to the other side and their hired appraiser so that the appraiser can conduct the appraisal.  This is a time consuming and aggravating task that takes away from your ability to run the business and take care of your daily affairs. Now the small business owner will have to produce additional records and projections that show the earnings that are held in the business bank account are absolutely essential to the operation of the business.  If the business owner cannot prove this, then there is a potential two prong problem this creates for the business owner. 

The first problem is that the additional earnings held in the business will be treated as if the business owner has paid themselves those earnings during the year of the divorce and that can greatly inflate the owner's actual salary or income.  This in turn is then used to help determine both alimony and child support (if applicable) which will inflate the amount of support that the business owner will have to pay.  Second, it allows the appraiser at the same time to essentially create a "double dip" with these "additional earnings" by using the money that is actually in the bank account to appraise the value of the business which of course increases the value of the business.  This in turn increases the amount of money that the owner spouse has to pay to the non-owner spouse in order to keep the business.

Divorce is always an area of the law that is filled with unsuspected pitfalls and issues. This is particularly true for the small business owner or anyone working in a family business for the reasons stated above.  If you are a small business owner, you are employed by or manage a family business, or are aware that a family member involved in the business is considered marriage or facing a potential divorce, please do not hesitate to contact us by clicking on this link or calling us at (248) 608-4123 to schedule a consultation.