Are Retained Earnings Considered Marital Property?
Article by Allison Sleight
If spouses have built a business together during their marriage, a common question during divorce proceedings is, “Are the retained earnings of the business considered marital property?” In short, the answer is yes. Both parties have a right to seek a division of the business value as part of the divorce settlement.
A business subject to division as part of a divorce often carries retained earnings, which are the profits that the company makes that are not distributed back to shareholders of the business. These profits are held in reserve and used for the needs and/or goals of the business, in some cases paying down debt or in others reinvestment into the business.
The division of shares in a company can become a contentious topic in divorce due to the contribution of retained earnings to the overall value of the company. Shareholders of the company certainly have an interest in retained earnings and the right to dictate the use of retained earnings on a going-forward basis. This often leaves the non-shareholder spouse in a precarious position with respect to value. If the court considers the shares of the business, or a portion thereof, to be marital property, their value must be divided among the parties. If the shares are considered nonmarital property, then the court must determine the spouses’ contribution to the value of the company and fair value of those shares.
Michigan is an equitable division state and, as a result, property is not necessarily divided 50/50 between parties to a divorce action. Rather, the division of marital property is made according to a variety of factors, including fault, needs, and personal resources.
Generally, all property acquired during the parties’ marriage is considered marital property. This includes business interests a spouse initiated following the marriage or prior to the marriage but which may have expanded considerably during the marriage.
When determining whether a company’s retained earnings are considered marital property as part of a divorce action the court may address the following:
- Are the retained earnings included as part of the total value of the business?
- Are the retained earnings used for reasonable corporate goals/needs?
- What is the level of control that the shareholder-spouse has over the distribution of retained earnings as dividends either to him or herself?
There are several methods to divide a business as part of a divorce. Some couples choose the buy-out option which requires valuation of the business and retained earnings. Others may choose to sell the business and split the profits. And still others opt to continue the business as a jointly owned asset.
In the event one spouse retains the business, the question can become to what extent retained earnings are to be included for the purposes of support calculations in the future. This is the notion of counting the same dollars twice that many business owners face or the “double-dip.” In this instance, the court will examine the retention of profits for unnecessary or illegitimate business expenses, inconsistency with historical practices, and the retention of funds to avoid support.
Allison Sleight serves clients throughout West Michigan and her primary office is located in downtown Grand Rapids, Michigan. To discuss your unique circumstances, call 616-258-7048.