In equitable distribution cases when the court divides marital property, a business ownership interest is an asset to be identified, classified, valued and distributed to (usually) one of them. Like any asset, it might be marital property or separate property and it may be distributed to either spouse if it is marital. The scope of this topic is very broad and cannot be fully addressed here. This article is a brief overview of the things experts, such as CPAs, might consider when performing a business valuation.
Business Entity: What is the Structure?
The way a business is organized impacts the value of it and the manner in which the business is taxed. Sole proprietorships are businesses owned and operated by an individual, created without filing any formal paperwork. Other businesses are created formally by paperwork filed with the NC Secretary of State. Limited liability companies (designated with “LLC”) are more suited to ownership by an individual or a few people, and they usually require less paperwork. Corporations (designated with “Inc.”) are formal, and require special paperwork to be annually maintained, corporate officers to be elected and formal bylaws to be followed.
Why the Business Structure Matters
There is value added or subtracted from the value of a business based on many factors, including whether the business is publicly traded or owned by a few people as a closely held corporation (CHC). CHCs owners are often family members who sign buy-sell agreements that require the co-owners to give each other the first right of refusal if one chooses to sell his or her share of ownership. The ability of an owner to sell his or her ownership interest is key because market value is based on what a willing buyer would pay a willing seller. In CHCs for example, willing buyers might require that only a few people, such as family members or business partners, get the first right of refusal in the event a spouse wants to sell. This can reduce the value of the business. If the business owner is a licensed professional, such as a doctor or lawyer, who works alone as a solo practitioner, the value is limited because the value of the practice depends on that one person whose license isn’t transferable. While a business or practice has a value, the actual professional license or business license that terminates on transfer is separate property. Businesses and any co-owners must be named as a party to the lawsuit for the court to have authority to order them to do things.
Factors That Impact Value
Name recognition of the business is known as “good will.” For example, a local car dealership that has existed for 40 years has more name recognition, and may be more valuable than, a brand-new dealership. Consumers tend to more highly trust an established business. Tangible assets contribute to the value as well. Company assets might include equipment and office supplies, vehicles, bank and investment accounts, certain contractual rights, promissory notes and outstanding accounts payable to the company, inventory, and even real estate. Retained earnings are funds that remain in the business accounts, instead of being distributed or paid to the owner(s). This is critical when determining income for purposes of support to the other spouse, especially if it is unclear whether these funds are counted twice, once as business value and again as income. Company debts and expenses can include mortgages, lines or credit and business loans, insurance, state and federal taxes for the business and employees, payroll, retirement contributions for employees, health insurance, etc. Business value is also impacted by potential liability in the event the business is faced with litigation (personal injury, unemployment claims, malpractice, bankruptcy, etc.) or the likelihood of anticipated litigation.