What Happens to a Closely Held Business in a High‑Asset Maryland Divorce?

For many entrepreneurs in Maryland, a business is more than just an income stream; it is a legacy built through decades of late nights, risk-taking, and relentless dedication. Whether you run a tech startup in the Bethesda corridor, a historic retail shop in downtown Annapolis, or a medical practice in Baltimore, your business often feels like a distinct entity with its own life. When a marriage dissolves, that entity frequently becomes the most contentious and complex asset on the table.

In a high-asset divorce, the business is often described as the “third party” in the courtroom. The fear that a divorce decree could force a liquidation or dismantle the company’s operations is real and valid. However, Maryland law does not mandate the destruction of a viable business to satisfy a marital settlement. The state operates under the principle of equitable distribution, which prioritizes fairness over a strict 50/50 split.

Is My Business Considered Marital Property in Maryland?

Determining whether a business is marital or non-marital property depends on when it was founded, how it was funded, and the specific contributions made during the marriage, regardless of whose name is on the corporate documents.

Maryland courts apply the “source of funds” theory to determine if a business is marital property. Generally, if you started the business during the marriage, it is presumed to be marital property. If you owned the business prior to the marriage, it might be considered non-marital property, but this distinction is rarely absolute. If the value of that pre-marital business increased during the marriage due to your active efforts known as “active appreciation” that increase in value is considered marital.

Furthermore, the commingling of assets can complicate this classification. If marital funds were used to expand the business, purchase equipment, or cover payroll during lean years, the character of the business may shift from non-marital to marital, or at least partially marital.

• Presumption of Marital Property: Assets acquired during the marriage are presumed marital until proven otherwise.
• Active vs. Passive Appreciation: Increases in value due to market forces (passive) may remain non-marital, while increases due to the owner’s work (active) are likely marital.
• Commingling Risks: Depositing joint funds into a business account can erode the non-marital status of the entity.
• Title is Not Decisive: Holding the stock or LLC membership solely in one spouse’s name does not prevent the court from classifying it as marital property.

The Source of Funds Rule and Tracing Assets

Maryland is distinct from many other jurisdictions because of its strict adherence to the source of funds rule. This legal concept dictates that property is not necessarily “all or nothing.” A single asset, such as a dental practice in Columbia or a consulting firm in Silver Spring, can be partially marital and partially non-marital.

For example, if you founded a logistics company five years before your marriage, the value of the company at the date of the marriage might be considered your separate property. However, if the company grew significantly over the next fifteen years of marriage due to your management and reinvestment of profits, the ratio of non-marital to marital interest shifts.

Tracing these funds requires meticulous documentation. In the Circuit Courts of Montgomery County or Anne Arundel County, judges expect clear financial evidence. We often work with forensic accountants to trace the historical capital contributions and retained earnings to establish exactly what percentage of the business belongs to the marriage and what percentage belongs to the founding spouse. Without this evidence, the court may default to classifying the entire asset as marital, significantly increasing the amount the non-owner spouse may be owed.

How Is a Closely Held Business Valued in a Maryland Divorce?

Business valuation in divorce is a complex process typically involving forensic experts who utilize the asset-based, income-based, or market-based approach to determine the fair market value of the entity while distinguishing between enterprise and personal goodwill.

Valuation is often the most expensive and time-consuming phase of a high-asset divorce. Unlike a bank account or a publicly traded stock portfolio, a private business does not have a readily available price tag. In Maryland, “Fair Market Value” is the standard usually applied, defined as the price at which property would change hands between a willing buyer and a willing seller.

To arrive at this number, forensic evaluators will generally employ one or a combination of three methods:

• Asset-Based Approach: Calculates the value based on the company’s net assets (assets minus liabilities). This is often used for holding companies or real estate investment firms.
• Income-Based Approach: Looks at the company’s projected future cash flow and discounts it to a present value. This is common for service-based businesses in areas like Bethesda or Rockville.
• Market-Based Approach: Compares the business to similar companies that have recently sold. This can be difficult for unique, closely held businesses where true comparables are scarce.

Crucially, Maryland law distinguishes between “enterprise goodwill” and “personal goodwill.” Enterprise goodwill is the value inherent in the business itself its brand, location, and systems and is generally considered marital property. Personal goodwill is the value tied specifically to the owner’s reputation and personal relationships. If the business would collapse without the owner’s spouse, that value is often considered personal goodwill and may be excluded from the marital estate.

• Forensic Analysis: Experts review tax returns, general ledgers, and profit and loss statements.
• Normalization of Income: Adjusting the books to account for personal expenses run through the business (e.g., family vehicles, travel).
• Goodwill Distinction: Separating the value of the “brand” from the value of the “individual.”
• Valuation Date: The value is typically determined as of the date of the divorce trial, not the date of separation, which can lead to disputes if the business value fluctuates during litigation.

The Role of the Monetary Award

Once the court has classified the business as marital property and determined its value, it does not typically order the business to be split in half. Maryland judges understand that closely held businesses, whether they are S-Corps, LLCs, or partnerships, rely on specific management structures that would be destroyed by forcing ex-spouses to remain business partners.

Instead of dividing the shares, the court uses a mechanism called a “Monetary Award.” This is a judgment against one party in favor of the other to adjust the equities of the parties.

For instance, if the husband retains the family IT business valued at $2 million, the court may grant the wife a monetary award of $1 million (or another equitable amount) to balance the distribution. This award is not necessarily a lump sum; the court has the discretion to order it paid over time or to order the transfer of other assets such as the marital home in Potomac or retirement accounts tisfy the award. This approach allows the business owner to retain full control and ownership of the entity while ensuring the other spouse receives their fair share of the marital wealth.

Will I Have to Sell My Business to Pay My Spouse?

Maryland courts generally prefer to leave a business intact and award the other spouse a monetary judgment or other marital assets to offset the value, rather than ordering a forced sale or liquidation of a viable company.

The court’s goal is equitable distribution, not corporate destruction. Judges in jurisdictions like Baltimore City and Howard County recognize that killing the “golden goose” serves no one’s interest, as it often provides the income stream necessary for alimony and child support. Consequently, a forced sale is a remedy of last resort, typically reserved for situations where there are no other assets to offset the value or where the business is merely a holding entity for liquid assets.

To avoid a sale, the business owner must often be creative in structuring the settlement. This might involve:

• Asset Swapping: The non-owner spouse keeps the house and the brokerage accounts, while the owner spouse keeps the business.
• Structured Settlements: Agreeing to pay the monetary award in installments over a period of years, secured by a lien on the business interest or a life insurance policy.
• Refinancing: The business owner may take out a loan against the business assets to pay a lump sum settlement.
• Alimony Trade-offs: In some negotiations, a spouse may accept higher alimony payments in exchange for a lower upfront buyout of the business interest.

“Double Dipping” in Valuation and Support

A critical issue in Maryland high-asset divorces involving business owners is the concept of “double dipping.” This occurs when the same stream of income is used twice: first to value the business (under the income-based approach) and second to calculate alimony and child support.

If a forensic accountant capitalizes the business’s future earnings to determine its present value, and the non-owner spouse receives a payout based on that value, it can be argued that it is unfair to also use those same future earnings to determine the owner’s ability to pay alimony.

While Maryland law does not strictly prohibit double-dipping, effective legal counsel will vigorously argue against it. Properly distinguishing between the income derived from reasonable compensation for services rendered (salary) and the excess earnings of the business (profit distributions) is essential. In the Circuit Courts across the state, from Towson to Upper Marlboro, presenting a clear financial picture that isolates these income streams is vital to preventing an inequitable financial burden on the business owner.

The Discovery Process: What to Expect

When a business is involved in a divorce, the discovery process the exchange of information between parties becomes invasive and exhaustive. The non-owner spouse’s legal team has the right to investigate the true value of the marital estate.

Business owners in Maryland should prepare to produce:

• Five Years of Tax Returns: Both personal and corporate.
• Financial Statements: Balance sheets, P&Ls, and cash flow statements.
• Bank and Credit Card Statements: For all business accounts to check for personal expenses.
• Governing Documents: Articles of Incorporation, Operating Agreements, and Buy-Sell Agreements.
• Loan Applications: These are often “smoking guns” because business owners tend to maximize their reported income when applying for credit, which can contradict lower income figures presented during divorce.

In competitive markets like the D.C. suburbs, where government contracting and consulting firms are common, confidentiality is a major concern. We frequently utilize protective orders to ensure that sensitive proprietary information, client lists, and trade secrets turned over during discovery are not leaked to competitors or made part of the public court record.

The Impact of Buy-Sell and Operating Agreements

If your business has multiple partners, you likely have an Operating Agreement or a Buy-Sell Agreement. These documents govern what happens when a partner divorces. They often include provisions that restrict the transfer of shares to a spouse or give the other partners the right to buy out the divorcing partner’s interest to prevent an ex-spouse from becoming a shareholder.

However, while these agreements are binding on the business partners, they are not always binding on the divorce court. A Maryland judge is not necessarily restricted to the valuation formula set forth in a Buy-Sell Agreement (e.g., book value) if it does not reflect the true fair market value of the interest. The court may determine that the agreement was created to artificially suppress the value of the shares for divorce purposes.

Nevertheless, these documents provide a critical baseline for defense. A well-drafted agreement created years before the marital discord arose is more likely to be respected by the court than one hastily assembled on the eve of separation.

Protecting the Business Before and During Marriage

While discussing divorce is never romantic, prenuptial and postnuptial agreements are the most effective tools for protecting a closely held business. In Maryland, a valid prenuptial agreement can explicitly designate a business as non-marital property, regardless of the effort or marital funds contributed to it later.

For business owners who are already married without a prenup, a postnuptial agreement can serve a similar function. This is particularly relevant when a business is poised for significant expansion or a liquidity event. By defining the marital interest in the business now, parties can avoid the destructive and expensive valuation battles that define high-conflict divorces.

Specific Considerations for Different Maryland Entities

The type of legal entity you own impacts how it is treated in a Maryland divorce:

• Sole Proprietorships: There is no legal distinction between the owner and the business. The assets are easily reachable, and “goodwill” is almost entirely personal, which can be advantageous for the owner in valuation but risky for liability.
• LLCs (Limited Liability Companies): The most common structure in Maryland. The operating agreement is critical here. If you are a member of a multi-member LLC, your “interest” is marital property, but your ability to liquidate that interest may be restricted by state statutes and the agreement itself.
• Corporations (S-Corps and C-Corps): Shareholder agreements dictate control. In S-Corps, the issue of “pass-through” income often confuses the calculation of actual disposable income for support purposes, as the tax return may show income that was never actually distributed to the owner.
• Professional Practices: For doctors, lawyers, and architects in Maryland, ethical rules often prohibit a non-professional spouse from owning shares in the practice. This forces the court to rely on a monetary award rather than a division of stock.