Divorce is complicated, especially when one of the spouses owns a small business or closely held corporation. In North Carolina, equitable distribution is the law that controls how property (including businesses) get divided in a divorce. In a nutshell, equitable distribution means that marital assets and debts get divided fairly. While there’s a presumption that “fair” means 50/50, that’s not always the case. If you or your spouse own a business, there’s a lot more to consider than just who gets the house or retirement account.

Here are 10 key points to consider if you (or your spouse) own an interest in a small business or closely held corporation.

1. The Business May Be Marital Property

Even if you started the business before you got married, your spouse may still have an equitable interest in the business. If the business grew during the marriage due to your efforts (this is called active appreciation), that growth could be considered marital property under North Carolina law.

Example: A dentist who opened a practice before marriage may still have to share part of its increased value if the practice grew thanks to long hours, new patients acquired during the marriage, or expanded services during the marriage.

2. Business Valuation is Critical

Before dividing anything, the business needs to be properly valued. Depending on the size of the business (e.g., cashflow, number of employees, assets owned by the company, etc.), you may want the business valued by a business valuation expert. Regardless on whether you ultimately decide to use an expert, you should speak with a family law attorney about the pros and cons of same.

3. Understand Business vs. Personal Goodwill

Goodwill is the value of a business beyond its physical assets. There are two types of goodwill — business goodwill and personal goodwill. Goodwill can have a significant impact on the value of a business, and it’s possible a court could find one type of goodwill marital while another type of goodwill nonmarital.

Example: A wedding photographer known for her unique style and brand may have personal goodwill in the business that can’t be separated from her identity. The question would be whether the photographer’s personal goodwill can be included in the value of the photography business.

4. Watch Out for Co-Mingled Finances

If you’ve used marital funds (like shared income or savings) to grow your business, that may make the business—or part of it—subject to equitable distribution.

Example: A construction company that used money from a joint account to buy heavy equipment during the marriage may now be partially owned by both spouses.

5. You Might Have to Buy Out Your Spouse

If your spouse is entitled to part of your business, you may need to “buy out” their share. This can be done through cash, transferring funds from an investment or retirement account, or taking on more debt.

6. Keep Personal and Business Finances Separate

During divorce, it’s important to have clear records. Speak to your accountant and family law attorney about separating your personal spending from business operations if you haven’t already. This makes the valuation process smoother and protects your credibility in court.

7. Don’t Hide Assets

Trying to move money, undervalue your business, or “suddenly” lose income can backfire. North Carolina courts take honesty seriously. Be transparent with your attorney so he can help you protect what’s fair without breaking the law.

8. Future Earnings May Be a Factor

Even if your business isn’t worth much now, future income might come into play, especially for support payments. The court may consider your earning capacity when deciding alimony or child support.

Example: A commercial real estate owner whose firm had a slow year may still be viewed as having high future earning potential based on past success.

9. Review Operating Agreements and Business Contracts

If your business has partners or co-owners, check your operating agreement or shareholder agreement. Does it address what happens if one owner divorces? Speak with your business lawyer about whether you should add a clause about valuation or buyout rights that can help protect the business.

10. Work With the Right Team

Divorcing as a business owner requires a good lawyer, and often a financial expert or CPA. You need someone who understands both family law and business law to help you protect your rights and your livelihood. That said, don’t mix legal advice. Use separate attorneys for your business and your divorce. While your divorce lawyer may understand family law, they may not be able to offer specific business legal advice, and vice versa.

Protect Your Business and Your Future
Bennett D. Rainey is a North Carolina Board Certified Family Law Specialist who helps small business owners and their spouses in and around Winston-Salem navigate divorce with smart strategies and strong legal support. Do not hesitate to contact Bennett to set up a consultation to discuss ways to ensure your business interests are protected.