A privately held business is a company with fewer than 500 shareholders. It does not trade its shares publicly and has fewer U.S. Securities and Exchange reporting requirements than publicly held companies. Privately held businesses are usually small sole proprietorships, partnerships, S-corporations, or Limited Liability Companies. It is also possible for a C-corporation to be private, though this is rare. Private companies can be large or small, but the vast majority is small businesses.

In 2018, Georgia boasted 1 million small businesses, which was 99.6 percent of all businesses in the state, employing 1.6 million people. In a state with a population of 10.5 million people, that means roughly 10-15 percent of Georgians own a small business. When it comes to divorce, the spouses’ interest in a private company they own adds another dimension to the process of property division. For this reason, it is wise to retain the services of an asset division attorney from our team before dividing a privately owned business in Alpharetta.

Important Considerations

It is legal and more cost-effective for divorcing spouses to negotiate a property settlement outside of court with regard to the disposition of their privately held business. This would include deciding on proportionate ownership, method of division, and any financial provisions, such as a schedule of payments the purchasing spouse will make to the selling spouse. If they are not able to draw up a property settlement agreement on their own, the local family courts become responsible for dividing it.

A privately held company, as with other property included in the divorce proceedings, receives neither the designation “owned by both spouses” (the principle of community property) nor “owned by one spouse” automatically. Instead, in Alpharetta, each privately owned business asset requires careful scrutiny by the jury, or the judge in a bench trial, as fact-finder to determine three things before division:

  1. Whether it is marital or separate property;
  2. What the value of the company is; and
  3. How that value will be distributed between them.

To answer the first question, the courts must examine whether one spouse owned the company prior to marriage; whether there any marital agreements such as pre- or postnuptial agreements that define ownership of the company; the source of funds and other, non-monetary contributions to the acquisition; and any improvements to the operation of the company.

One thing the courts look at is title, but this is not determinative. For instance, one spouse’s name on the title to heavy equipment or on a bank account or a lease does not indicate exclusive ownership, indebtedness, or operation of these assets by that spouse alone. In our area, other indicators – even non-monetary indicators such as one spouse’s investment of care into the children or household while the other worked at the company – tell the fact-finder at trial what proportion of the company is owned by the “marital unit” and what proportion could be considered separate property.

Tax Implications of the Valuation of a Privately Held Business

For property tax purposes, business values are assessed using the value of their real property, equipment, machinery, and fixtures. Where the fair market value of a business cannot be ascertained because comparable businesses are not available on the market or no ready buyer is making an offer, then the County Tax Assessors may use all reasonable, available information to assess the value of the equipment, machinery, and fixtures of the business. This then is taken as the fair market value of the business as a whole.

A spouse who is awarded the family business in a divorce will assume responsibility for annual real property taxes, equipment, machinery, and fixtures taxes, as well as income taxes going forward. The capital basis remains the basis at the time of acquisition of the business; it is not adjusted as of the date of the Settlement Agreement. The new business owner will also be able to enjoy the write-offs for expenses, depreciation, and professional fees as usual.

If the business is a warehouse operation located in Fulton County, then the owner may apply for a Freeport Exemption which will waive 100 percent of the company’s taxes on inventory, but real property and income will still be taxed.

If the family business is deemed marital property due to the source of funds rule, and the finders of fact have traced investments in the business to funds or efforts contributed by both spouses, then the business will be subject to equitable distribution. If the business is sold, then both parties become responsible for their proportion of the income (or debt) from the sale of the business on their tax return the following year.

The Importance of Valuing a Privately Held Business

Privately held businesses do not have a publicly established value. Usually, both spouses have the business appraised by professional business evaluators, who use one of several methods to calculate the value, including:

  • Asset-based valuation, where the total liabilities of a company are subtracted from its total assets;
  • Market-based valuation, which compares the selling price of comparative businesses in the same industry; and
  • Discounted cash flow, which shows the present value of a business’s future cash flow, accounting for risk.

Spouses can negotiate an agreed-upon value based on these appraisals, or the jury or judge at trial can ascertain which of these two valuations is most credible, or can call for a third, independent appraisal.

Once the business has an established value, it can then be divided between the divorcing couple. This usually occurs in one of three ways:

  • One spouse buys out the other’s share (most common);
  • The couple sells the business and splits the sales price; or
  • The two divorcing spouses remain co-owners with carefully defined rights and roles (rarest).

If one spouse wants to sell the business and the other does not, it can be sold through court order in the divorce settlement.

In Alpharetta, the courts divide marital property equitably, not evenly, so whether one spouse pays cash for the other’s half-interest, trades sufficient non-business assets to cover that half of the business, or the business is sold outright and the proceeds split, the total valuation of the private business will enter into the fact-finder’s equation for determining an equitable distribution of ALL the marital property.

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Atlanta Divorce Law Group

Sara Khaki
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Atlanta Divorce Law Group
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