NEW YORK, NY – When a spouse owns a business, New York courts must determine whether it qualifies as marital property, apply recognized financial methods to value it, and then divide it equitably under state law. Manhattan property division attorney Richard Roman Shum of the Law Office of Richard Roman Shum, Esq. (https://www.romanshum.com/blog/my-spouse-owns-a-business-how-is-it-valued-in-our-divorce/) provides guidance to clients on how business interests are classified, valued, and distributed during divorce proceedings.

According to Manhattan property division attorney Richard Roman Shum, the first question in any divorce involving a business is whether the company is marital property under Domestic Relations Law § 236(b). Marital property generally includes property acquired by either or both spouses during the marriage and before the execution of a separation agreement or commencement of a matrimonial action, regardless of whose name appears on the title. “A business founded or purchased during the marriage is generally presumed to be marital property,” Shum explains. “When a premarital business increases in value during the marriage, the appreciation may also be marital to the extent it resulted from marital contributions.”

Manhattan property division attorney Richard Roman Shum notes that the distinction between separate and marital property turns on when and how the business was acquired, not on whose name is on the ownership documents. Separate property includes assets owned before marriage, inheritances or gifts received individually, compensation for personal injuries, and property designated as separate under a valid prenuptial or postnuptial agreement. However, even a business that begins as separate property can become partially marital through active appreciation tied to spousal effort or through commingling of business and marital funds.

Attorney Shum points out that New York courts distinguish between active appreciation, which is tied to spousal effort or marital contributions such as managing operations, acquiring clients, or providing homemaking and childcare support, and passive appreciation, which results from market forces, inflation, or external factors. Passive appreciation generally remains separate if the underlying business is separate property. Commingling, by contrast, occurs when separate and marital assets blend, such as depositing business income into joint accounts, using marital funds to pay business debts, or adding a spouse’s name to ownership documents. The firm notes that depositing separate funds into a joint account creates a presumption of a gift to the marriage, and the spouse who deposited the funds must rebut that presumption with clear and convincing evidence.

Attorney Shum explains that New York’s equitable distribution law is guided by fairness rather than mathematical equality. Courts evaluate both the direct contributions of each spouse, such as managing operations or generating revenue, and the indirect contributions, such as homemaking, childcare, and career sacrifices. A spouse who maintained the household or raised children may be entitled to a meaningful share of the business’s value, even without direct involvement in the company. Relevant factors include the income and property of each spouse at marriage and at commencement, the duration of the marriage, age and health, any award of maintenance, the probable future financial circumstances, the difficulty of valuing the business, and the tax consequences to each party.

The firm advises that business valuation is typically performed by forensic accountants, CPAs, or valuation professionals with credentials such as the Accredited in Business Valuation designation. Three main methods are used. The income approach calculates normalized earnings and applies a capitalization or discount rate to convert those earnings into present value, and is most commonly used for operating businesses with steady revenue. The market approach values a business by comparing it to recent sales of similar companies, and is most useful when reliable comparable data exists. The asset, or net-worth, approach determines value by subtracting total liabilities from the fair market value of all business assets, and is best suited for asset-heavy or low-revenue businesses.

Shum adds that normalization is a central part of the process. Privately owned businesses often report financials designed to minimize tax liability rather than reflect full profitability, and forensic accountants typically add back excess compensation, personal vehicle expenses, personal travel and entertainment, discretionary personal expenses, non-recurring events, and related-party transactions to produce a normalized earnings figure. “Normalization often results in a significantly higher valuation than what appears on tax returns,” Shum notes. “Tax-reduction practices that lower a business owner’s reported income can increase the company’s appraised value in a divorce.”

The firm also addresses goodwill, which refers to the intangible value that allows a business to earn more than its physical assets alone would suggest. Enterprise goodwill, inherent to the business and transferable, is treated as marital property when developed during the marriage. Personal goodwill, tied to the owner’s reputation, skills, or relationships, is handled more cautiously. Following a 2015 statutory amendment to DRL § 236(B)(5)(d) that took effect in January 2016, New York law now limits the division of purely personal goodwill and future earning capacity, and a spouse’s higher earning power from a license or degree is no longer a separately divisible asset, though courts can still consider the other spouse’s contributions when dividing other property.

Shum advises that the valuation date can significantly affect outcomes. For active assets such as a business whose value depends heavily on a spouse’s labor, courts often use the commencement date, but DRL § 236 allows the valuation date to be any date from commencement to trial, with courts retaining discretion to choose a different date when fairness requires it. The most common resolution is a buyout, in which the owner-spouse retains the company and compensates the other spouse through a lump sum or a structured distributive award. An asset offset, in which the non-owner receives other marital assets equal in value to the business share, is another common option. Forced sale is generally a last resort because it can disrupt operations and damage goodwill, and post-divorce co-ownership is rare.

For Manhattan clients dividing a business in divorce, working with experienced counsel and qualified financial experts can help ensure that the company is properly classified, accurately valued, and fairly divided.

About Law Office of Richard Roman Shum, Esq.:

Law Office of Richard Roman Shum, Esq. is a Manhattan-based law firm focused on divorce, property division, equitable distribution, business valuation, child custody and support, and related family law matters. Led by attorney Richard Roman Shum, the firm represents clients throughout Manhattan and the surrounding New York City area. The office is located at 20 Clinton St FRNT 5D, New York, NY 10002. For consultations, call (646) 259-3416.

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Email: richard@romanshum.com

Website: https://www.romanshum.com/

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Company Name: Law Office of Richard Roman Shum, Esq PLLC
Contact Person: Richard Roman Shum
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Phone: (646) 259-3416
Address:20 Clinton St FRNT 5D
City: New York
State: New York 10002
Country: United States
Website: https://www.romanshum.com/