A privately held business is a company with fewer than 500 shareholders that 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 it is rare. Private companies can be large or small, but the vast majority are 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. You should enlist the help of a lawyer from our firm when dividing a privately owned business in Atlanta, as the type of asset you’re dividing can greatly impact a divorce case.

Benefits of Entering a Marital Agreement

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, including proportionate ownership, method of division, and any financial provisions such as a schedule of payments the purchasing spouse will make to the selling spouse. In the event that divorcing spouses are not able to draw up their own property settlement agreement, the courts become responsible for dividing it.

Determining Ownership of a Privately Held Business

In Atlanta, a privately held company requires careful scrutiny by the jury, or the judge in a bench trial, to determine whether it is marital or separate property, the value of the company, and how that value will be distributed between the parties. To answer the first question, the courts will examine whether one spouse owned the company prior to the marriage, whether there any marital agreements that define ownership of the company, and the source of funds and other, non-monetary contributions to the company’s acquisition, improvement, or operation.

A judge may look at a business’s title, but it is not determinative. For instance, one spouse’s name on the title to equipment, a bank account, or a lease does not indicate exclusive ownership, indebtedness, or operation of these assets by that spouse alone. 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 what proportion of the company is owned by the “marital unit” and what proportion could be considered separate property.

What Role Does the Valuation of a Privately Held Company Play in Dividing Assets?

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

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

The spouses can negotiate an agreed-upon value based on these appraisals, or the judge can ascertain which valuation is most credible or call for a third, independent appraisal. Once the value of the business is established, then it can be divided between the spouses. 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 divorcing spouses remain co-owners with carefully defined rights and roles (rare).

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 Atlanta, 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 are split, the total valuation of the private business will enter the fact-finder’s equation for determining an equitable distribution of ALL the marital property.

With all of these nuances in dividing a privately owned business in Atlanta, it is in your best interest to consult with a local attorney about potential challenges and how to mitigate them with creative solutions. Call our intake team to get started.

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Atlanta Divorce Law Group

Sara Khaki
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Atlanta Divorce Law Group
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