At the time of divorce, a business may be in one spouse’s name or in both spouses’ names. The business may have been created by one spouse before the marriage, or by one or both spouses during the marriage, and may be owned in part by persons other than the spouses.

Ownership may be in the form of interests in a partnership, membership interests in a limited liability company, or shareholder interests in a corporation. Or the business may be operated as a sole proprietorship (an individual person) and not as a separate legal entity. Businesses owned by a small number of persons (often family members and friends) and whose shares are not publicly traded on a stock exchange are known as closely-held businesses.

The questions of (1) whether the business was created by one spouse before the marriage or was created during the marriage and (2) the form of the business entity and the related agreements between the business owners may impact the division of the divorcing spouses’ interests in the business.

If the spouses live in a community property state (as opposed to an equitable distribution/common law property state), and if the business was created by one spouse before the marriage, income earned from the separate property business and any appreciation (increase) in the value of the business interest during the marriage may be community property rather than separate property. Community property states generally include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In other states—so-called equitable distribution or common law property states—the divorce court attempts to divide the spouses’ assets equitably (fairly) and may order one spouse to contribute separate property to the other spouse in an effort to do so. In practice, the difference between the division of assets in community property states and in equitable distribution states is sometimes not as great as it may seem, as the court in a community property state may have the discretion to divide the spouses’ community property on a 60-40, 70-30, or other unequal basis.

When evaluating the division of a business interest in divorce, it is also important to consider any tax implications for the division of the business. And it may be necessary for the spouses to hire a business appraisal expert to make a valuation of the business.

In Arizona, which is a community property state, the division of business interests during a divorce can be complex. If a business was established by one spouse prior to the marriage, the income and appreciation of the business during the marriage are typically considered community property. This means that both spouses may have a claim to these assets in a divorce. The form of the business entity—whether it's a partnership, limited liability company, corporation, or sole proprietorship—and any agreements between business owners can also affect how interests are divided. Arizona courts aim to divide community property equitably, though not necessarily equally, and may distribute assets on an unequal basis if deemed fair. It's important to note that tax consequences are a critical consideration when dividing a business in a divorce. Additionally, the services of a business appraisal expert are often required to accurately value the business for the purposes of asset division. An attorney can provide specific guidance on how these general principles apply to an individual's situation.