If You Liquidate a Family Business, How Are Assets Divided?

By Sheryl Rentz on January 20, 2022

In a Pennsylvania divorce, all marital assets are divided under state “equitable distribution” laws. Property must be divided fairly, taking a number of factors into consideration, including the length of the marriage and the earning ability of each spouse. Marital property is all property acquired by either spouse during the marriage, or using funds earned during the marriage. This may include a family business.

How Is a Family Business Valued?

Business valuation is a process to determine the current worth of a company. It may factor in the market value of the company’s assets, along with its capital structure, management, and future earning potential. Different methods can be used for valuation, depending on corporate structure of the company, including:

• Market capitalization: This is the simplest method for business valuation. To arrive at the valuation amount, the company’ share price is multiplied by the total number of outstanding shares.
• Times revenue: A stream of revenues generated over a specific time period is multiplied by a certain number. That number will depend on the economic environment at the time and the company’s industry.
• Earnings multiplier: This method can provide a more accurate picture of the company’s value, as profits are a better indicator of success than sales revenue. Future profits are adjusted against cash flow that could be invested over the same period, earning at current interest rates.
• Liquidation value: This is the net cash the business would have if all its assets were liquidated, and all its liabilities were paid at the present time.

What Do Business Assets Entail?

Assets are any items of value owned by the business. They may be tangible assets, such as real estate, vehicles, equipment, or furniture, or they may be intangible assets, such as intellectual property or goodwill. Business assets are divided into two basic categories:

• Current assets: Business assets that will be converted into cash within one year are current. Examples include cash on hand, inventory, receivables, and marketable securities.
• Long-term assets: These are fewer liquid assets that will not be converted into cash within the current year. Real estate, equipment, intellectual property, and investments are included in this category.

How Are Assets Divided After Liquidating a Family Business?

Assets remaining after a family business is liquidated will be divided according to Pennsylvania equitable distribution laws. Fault or marital misconduct are not taken into consideration. Either the spouses will reach a settlement agreement before entering the court system, or all marital property will be divided fairly between the spouses, at the discretion of the court. This does not necessarily mean a 50/50 split. Among other things, the court will consider any prenuptial or postnuptial agreements, the length of the marriage, and the age, health, and income of both parties.

What Obligations Must Be Met Before Dividing Family Business Assets?

When a family business is dissolved, certain obligations must be met before assets can be distributed between the spouses.

• All bills must be paid, leases and contracts must be canceled or settled, employees and independent contractors must be paid, and taxes must be filed and paid, including sales tax, payroll and unemployment taxes, and business income tax.
• To officially dissolve the company, you must get tax clearance from the Department of Revenue and the Department of Labor and file a Certificate of Dissolution with the Department of State.
• If you have partners in the business or the company has shareholders, they must be paid in proportion to their interest in the business. Assets should be split among LLC members based on the relative size of each member’s capital account.

Distribution of assets in a divorce can be a complicated process, particularly when a family business is involved. An experienced Pennsylvania divorce attorney can help. Contact the Law Offices of Sheryl R. Rentz, P.C. at (610) 645-0100 for skilled and dedicated representation.