How is ownership interest in small businesses divided?

On Behalf of | May 30, 2024 | Divorce |

Minnesota has several common ownership structures for small businesses. Ownership interest defines who owns what portion of the business and how the sharing of profits and responsibilities occurs.

Dividing ownership interest can be complex, especially during divorce.

Types of ownership structures

About 534,397 small businesses operate in Minnesota. Common ownership structures include sole proprietorships, partnerships, limited liability companies (LLCs) and corporations. Each structure has different rules and implications for ownership interest.

In a sole proprietorship, one person owns the entire business. The owner has full control but also bears all the risks. In a partnership, two or more people share ownership and profits, losses and management duties according to their agreement.

LLCs offer more flexibility. Owners, called members, can divide ownership interest in any way they choose, regardless of their capital contributions. Corporations issue shares of stock to their owners, known as shareholders. Each share represents a portion of ownership. Shareholders have voting rights proportional to their shares.

Ownership interest during a divorce

Divorce can significantly affect ownership interest in a small business. Minnesota is an equitable distribution state, meaning that marital property is divided fairly, but not necessarily equally, during a divorce. This includes business interests acquired during the marriage.

To determine the division of business ownership, courts consider various factors. These include the duration of the marriage, the contributions of each spouse to the business and the economic circumstances of each spouse. If one spouse started the business before the marriage, only the increase in value during the marriage might be marital property.

Protecting ownership interests

To protect ownership interests, small business owners in Minnesota can take several steps. A clear operating agreement or partnership agreement is important. These documents should outline the distribution of ownership and the process for handling major events such as divorce. Prenuptial or postnuptial agreements can also define what happens to the business.

Another strategy is to keep business and personal finances separate. This can help demonstrate the business’s value and contributions independently of marital assets. Regularly updating business valuations can also provide clear evidence of the business’s worth over time.

Understanding how ownership interest is divided and protected can help small-business owners in Minnesota navigate complex situations and ensure the continuity of their business.

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