Is My Business an Asset in My Pennsylvania Divorce?
The answer — like most answers to legal questions — is maybe. While the question of whether a business is an asset in a Pennsylvania divorce case may seem like a simple one, it is a complex issue with many layers.
The initial inquiry is whether the business is an asset of the marriage. Factors such as when the business was started and the ownership structure of the business have an impact on that determination.
A secondary, and many times more problematic issue, is what is the value of the business for purposes of Equitable Distribution?
Personal Goodwill and Enterprise Goodwill
In determining the “marital value” of the business, Pennsylvania courts have to consider the value of “personal goodwill” and “enterprise goodwill” which are intangible qualities that aren’t as easily measured as things like capital assets and accounts receivable.
Personal goodwill refers to the value of a business that is directly attributable to the individual skills, reputation, and personal relationships of the business owner. Personal goodwill is not transferable because it is tied to the individual owner’s personal attributes. In divorce proceedings, personal goodwill is often not considered a marital asset subject to division because it is seen as personal to the owner and not separable from them.
Enterprise goodwill, also known as business or institutional goodwill, refers to the value of a business that exists independently of the owner’s personal reputation or relationships. This goodwill is attributable to the business itself, including its established processes, brand recognition, customer base, and other intangible assets. Unlike personal goodwill, enterprise goodwill is transferable and can be sold along with the business. Enterprise goodwill is generally considered a marital asset and is subject to division during divorce because it can be separated from the individual owner and transferred as part of the business.
Importance in Divorce Proceedings
In Pennsylvania, the distinction between personal and enterprise goodwill can significantly affect the outcome of business valuation and asset division in a divorce:
- Valuation Methods: Experts use different methods to assess personal and enterprise goodwill, often requiring specialized knowledge to accurately attribute portions of the business’s value.
- Asset Division: The court typically considers enterprise goodwill as part of the marital estate, which means it is subject to equitable distribution between the spouses. Personal goodwill, however, is usually excluded from marital assets.
- Equitable Distribution: Understanding these distinctions ensures a fair division of assets, aligning with PA’s equitable distribution principles where marital property is divided based on fairness, not necessarily equally.
Legal Consultation
If you or your spouse own a business, contact Colgan & Associates, LLC for a free consultation to discuss the important considerations related to that business in your Pennsylvania divorce either by means of mediation services or traditional divorce and court.
