In general, the same way you have been. The business does not stop because a petition was filed and payroll still runs on Friday. The vendor expects payment and the customer expects delivery and nobody at the company is waiting for a court to decide anything.
What changes is that some of the decisions you make while running the business will be reviewed during the divorce litigation and a few transactions may require your spouse’s signature when it was not required before filing.
First, Who Owns the Business?
Before anything else, the business has to be characterized as either community property or sole and separate property. That answer affects everything that follows. Arizona law reads:
A.R.S. § 25-211(A). “All property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is: 1. Acquired by gift, devise or descent. 2. Acquired after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.”
A.R.S. § 25-213(A). “A spouse’s real and personal property that is owned by that spouse before marriage and that is acquired by that spouse during the marriage by gift, devise or descent, and the increase, rents, issues and profits of that property, is the separate property of that spouse.”
Four situations come up most often for businesses.
It is community property. It does not matter whose name is on the formation documents, who signed the operating agreement, or who did the work. Property acquired during the marriage is presumed community property.
This is the situation that surprises people. The business itself remains sole and separate property and so do its increase, rents, issues and profits under the statute. But your labor during the marriage belonged to the community and Arizona law does not allow one spouse to convert community effort into sole and separate value without accounting for it.
In the Arizona case of Cockrill v. Cockrill, the Supreme Court held that profits resulting from a combination of sole and separate property and community labor must be apportioned between the two. The increase during the marriage is presumed to be community, and that amount is what the other spouse is owed in the settlement. If one spouse claims the business is sole and separate property, that spouse carries the burden of proving the increase resulted from the inherent nature of the property rather than from community effort.
The community’s share becomes a dollar figure during the divorce. Cockrill sets out more than one accounting approach for arriving at it and the court selects among them based on the facts of the particular business.
The first approach is to determine the reasonable value of the community’s services during the marriage and allocate that amount to the community which is then divided in half to pay the “lien” to the other spouse. The balance of the increase is then treated as sole and separate property attributable to the inherent nature of the business itself. This method fits a company whose growth came mostly from capital, from market forces, or from the nature of the asset rather than from the spouse’s daily work.
The second approach is to allocate to the sole and separate property a reasonable rate of return on the original capital investment. Any increase above that amount is community property. This method fits a company whose growth came mostly from the owner’s own effort during the marriage.
Cockrill is explicit that different circumstances require different methods and that the trial court is not bound by any one of them. The governing question is which approach achieves substantial justice between these two people. That is why apportionment is argued rather than simply calculated and why the expert’s choice of method often matters more than the arithmetic that follows it. Spouses generally retain an expert to help with this argument and calculation.
The practical consequence is that a business can remain sole and separate property while the other spouse is still entitled to be paid for the community’s share of the increase. What is usually in dispute is not whether the community has a claim but how it is calculated and what it comes to.
Property acquired by gift, devise or descent is sole and separate property whether it was received before the marriage or during it. The same apportionment question then follows. If you operated the inherited or gifted company for fifteen years during the marriage, the community contributed labor to it, and Cockrill applies to that increase just as it does to a business owned before the wedding.
Then the agreement governs as long as it is enforceable. Arizona law permits parties to contract about the rights and obligations in any property. A premarital agreement must be in writing and signed by both parties and it is enforceable without consideration.
An agreement is not enforceable if the person opposing it proves either of two things. The statute enumerates them separately, and the second has three parts that must all be present.
That the person did not execute the agreement voluntarily; or
That the agreement was unconscionable when it was executed and, before execution, that person: was not provided a fair and reasonable disclosure of the property or financial obligations of the other party; did not voluntarily and expressly waive, in writing, any right to that disclosure beyond what was provided; and did not have, and could not reasonably have had, adequate knowledge of the property or financial obligations of the other party.
Unconscionability is decided by the court as a matter of law. After marriage, a premarital agreement may be amended or revoked only by a written agreement signed by both parties.
How Does the Preliminary Injunction Affect the Business?
When a dissolution is filed in Arizona, the court issues a preliminary injunction directed at both spouses. It prohibits transferring, encumbering, concealing, selling or otherwise disposing of community property. It also contains an exception for transactions in the “usual course of business.”
That exception allows a company to keep operating. Ordinary operations continue, including paying vendors, meeting payroll, buying inventory, renewing a service contract, collecting receivables and replacing equipment that broke. None of that is what the injunction is aimed at.
The difficulty is that usual course of business is not defined by a list. It is measured against how the company actually operated before the filing, so a distribution you have taken every quarter for nine years looks different from the same distribution taken for the first time three weeks after service. Business owners should consider keeping the status quo unless there are business reasons to operate otherwise.
What Actions Might Now Require the Signature of My Spouse?
Arizona law generally gives each spouse equal management and control of community property and equal power to bind the community. Either of you could sign for the community. That changes when the petition is served.
A.R.S. § 25-214(C). Joinder of both spouses is required to bind the community, irrespective of any person’s intent with respect to that binder, after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
In plain terms, once your spouse has been served you can no longer obligate the community on your own. If the company borrows money, signs a personal guaranty, takes a long-term lease or enters a contract that puts community assets behind it, your spouse may need to sign as well.
Without that signature the transaction may not bind the community, which is a problem for the lender as much as for you. That is why lenders often want both signatures once they learn a divorce is pending. If the company is expanding, borrowing or signing anything long term while the matter is pending, you may need legal advice.
When Can I Conduct a Business Valuation?
The first question is whether a valuation is needed at all. Not every business requires a formal valuation, and a report is expensive. A valuation earns its cost when the number will actually change something.
It is worth having when the business is the largest asset and one spouse is buying the other out, when the parties disagree about value and the gap is wide enough to matter, when income from the business drives a support analysis, or when a sole and separate property claim needs apportionment.
It is often not the right spend when both spouses already agree on a number they can live with, when the business produces just enough income for the one person doing all the work and has little value apart from that person, when the company is being sold and the market will set the price, or when the cost of the report is out of proportion to the amount in dispute.
There is a middle option that people forget. A calculation of value or a limited-scope engagement costs less than a full opinion and is often enough to inform a settlement, although it carries less weight if the matter is tried.
The timing follows the decisions rather than the other way around, so there is no single right moment. Before a valuation is commissioned, the three questions below should already have answers: who wants to keep the business, who is going to run it, and where the money comes from to pay the other spouse for a share. A valuation ordered before those are answered is often money spent on a question that turns out not to matter.
The documents should also be gathered first. An expert working from incomplete records produces a report that is easy to attack, and the rebuttal is frequently factual rather than theoretical. It can be as simple as the wrong number of employees or the wrong tax years, which are inexpensive errors to prevent and expensive ones to correct.
For a focused explanation of methods, experts, and buyout issues, read how a business is valued in an Arizona divorce.
What Is the Valuation Date?
There is no fixed valuation date in Arizona, and this is one of the most commonly misunderstood points in a business divorce. The date of service ends the marital community and it is a natural starting point.
But in Meister v. Meister the Arizona Court of Appeals held that no Arizona authority mandates or even suggests that a community asset must be valued at or near the date of service. The superior court has wide discretion to choose a business’s valuation date so long as the ultimate valuation is equitable. The court may use the date of service or a date near it as a starting point, but it must select a different date when necessary to ensure an equitable result.
Meister itself shows why this matters. The company lost its largest customer, the source of roughly ninety percent of its revenue, within a month of the valuation date the trial court adopted, along with a receivable approaching one million dollars.
One expert valued the company at more than two and a half million dollars using a date near service. The other valued it at slightly over one million using a date nine months later, after the consequences of losing that client were apparent. The Court of Appeals vacated the valuation because the trial court had not explained how its chosen date produced an equitable result.
The court also addressed foreseeability, which is the argument valuation experts most often have with each other about dates. Whether an event was known or knowable on a given date may be a relevant factor, but it cannot control the choice of valuation date, because the governing question is whether the date produces an equitable result. The practical lesson is that the valuation date is an argument rather than a date certain.
Will My Business Decisions Be Examined After the Divorce Is Filed?
The value of the business is being determined while you continue to operate it, which means the operating decisions and the valuation are not separate things. The following draw attention.
- Changing your own compensation. Raising it or lowering it both draw suspicion and questions.
- Starting, stopping or resizing distributions to owners.
- Delaying a contract, a closing or a collection until after the decree.
- Accelerating expenses or prepaying obligations.
- Putting family members on payroll.
- Large purchases that are defensible in isolation and unusual in timing.
Arizona law allows a court to consider excessive or abnormal expenditures, destruction, concealment or fraudulent disposition of community property when it divides property. The same conduct is one of the factors the court weighs in a spousal maintenance analysis, and the same records that reveal that conduct also produce the income figure used for support. One decision can be looked at more than once.
This is not a theoretical concern. In Meister the trial court found that the husband had unilaterally taken large cash distributions, increased his salary, closed bank accounts, canceled his wife’s company credit card, blocked her access to financial accounts, and sold more than a million dollars in company equipment without her consent and in violation of court orders.
The spouse alleging waste carries the burden of a prima facie showing. Once that showing is made the burden shifts to the spending spouse to rebut it, because the evidence about the spending is generally in that spouse’s own hands. When waste reduces the value of a community business a court may take it into account in selecting the valuation date and the actual value.
What About My Business Partners?
A business has partners, co-owners, lenders, key employees and customers. None of them are parties to the divorce and all of them can be affected by it.
- Does the operating agreement or buy-sell agreement say anything about divorce? Many do. Some require notice. Some restrict transfers of an interest.
- Do the loan documents have covenants triggered by a change in ownership?
- Does a co-owner need to know, and when?
These documents should be located and read early. They frequently constrain what any settlement can look like, which means finding them late can undo work already done.
Will the Business Books Be Examined?
Yes, and not only where child support is involved. In any divorce involving a closely held business the books are examined, through the disclosure each spouse owes the other, through discovery, and through whatever expert is engaged to value the company. That examination is how the community share of a business gets determined in the first place.
Personal expenses run through a business are common and entirely visible to anyone who looks. The car, the phone, the travel and the family member on the payroll all surface. These are not necessarily improper, but they are going to be found, and they affect both the value of the business and the income figure used for support.
There is also a specific statutory tool that exists in cases involving children. Where child support is at issue and at least one parent is self-employed, Arizona law allows the court, on the request of either parent or on its own motion, to order both parents to meet with a federally authorized tax practitioner before it enters a child support order. That person reviews the accuracy of the self-employed parent’s records and submits a written report to the court.
Each parent may propose names. If the parents cannot agree, the court chooses from the names submitted, and the court decides who pays the cost. In a case with no children that particular tool is not available, but the books are examined anyway for the reasons above.
Decide the End Game Early. In Other Words, Who Wants What?
The most expensive mistake is doing the work in the wrong order. Before anyone retains an expert, three questions should be answered.
- Who wants to keep the business?
- Who is going to run it?
- Where does the money come from to pay the other spouse for their equitable share?
The answers set the scope of every other decision. Some businesses produce just enough income for the one person doing all the work, and a full valuation may not be the right spend, while others are large enough that the cost is proportionate and the answer changes the outcome. The questions are worth asking before retaining experts.
Can the Division of Property or the Value of a Business Be Modified in the Future?
Generally, no. Spousal maintenance and child support can be modified after a decree on a showing of changed circumstances that are substantial and continuing, but the division of property cannot. Arizona law provides that the provisions of a decree as to property disposition may not be revoked or modified unless the court finds the existence of conditions that justify reopening a judgment.
Once the decree is entered, or a written settlement agreement is signed and approved, the property division is final. The exception is dishonesty, and it takes two different forms that people tend to confuse.
The first is setting aside the decree. The family law rules allow a court to relieve a party from a final judgment for reasons that include newly discovered evidence that could not have been found earlier with reasonable diligence, and fraud, misrepresentation or other misconduct by the opposing party. The deadlines are short and they differ depending on which ground applies, so if you believe something was hidden, ask about it promptly rather than after you have gathered every last document.
The second involves community property for which no provision is made in the decree. That property is held by the former spouses as tenants in common from the date of the decree, each owning an undivided one-half interest. An asset that was concealed and therefore never divided was never decided at all, so there may be nothing to reopen, because the property may still belong to both of you and can be divided in a later action.
That is the practical reason disclosure matters so much in a business case. The spouse who discloses fully gets finality. The spouse who does not may find that the account or the deferred compensation or the entity nobody put in the decree is still half someone else’s years later.
Where to Start
Locate the business operating agreement, the buy-sell, the loan documents and the last three years of business tax returns. Consider doing that before filing while nobody is waiting on you.
Find the agreements between the two of you as well, including a premarital agreement, anything signed during the marriage, and a separation agreement. These matter more than people expect because a valid agreement can answer the ownership question before anyone spends money on a valuation and because the answer it gives may not be the one either spouse remembers.
Bring these documents to the first meeting with your attorney. Whether an agreement is enforceable is its own question and it is one of the first things worth knowing. If you cannot find your copy the lawyer who drafted it may still have one.
Tali Best Collins handles every new client consultation personally. Clients do not need to have it all figured out before they call. You just need your story. That is where we start.
Business and divorce questions
Can I keep running my business during a divorce?
Generally, yes. Normal operations can continue, but unusual transactions, compensation changes, distributions, borrowing, and major contracts may receive added scrutiny.
How does Arizona's preliminary injunction affect a business?
The injunction restricts transfers and dispositions of community property but includes an exception for transactions in the usual course of business.
When is a formal business valuation worth the cost?
It is most useful when value will change the outcome, such as a buyout, a significant valuation disagreement, support analysis, or apportionment of a separate-property business.
What valuation date applies to an Arizona business?
Arizona does not impose one fixed date. A court has discretion to select a date that produces an equitable result based on the facts.
Can business property division be modified later?
Generally no. Property disposition is final unless grounds exist to reopen the judgment, while undisposed community property may remain jointly owned after the decree.
