How can sweat equity work in divorce?
Business owners who go through a divorce face the question of how much value a spouse has put into the business. This is important to figure out because if your spouse has contributed money to your business, he or she will probably have an entitlement to some of the value of your company. This may also happen if your spouse has contributed sweat equity.
Sweat equity does not involve your spouse investing money into your business. It may not be a formal business relationship at all. Nonetheless, the amount of sweat equity your spouse has put into your business could become a factor in the divorce.
How sweat equity works
According to Bankrate, if you perform work on a property that increases its value, you have contributed sweat equity. There are many ways a person can boost the value of property. If you paint a car and put in new windows, you have made that car more valuable. Likewise, you could add to the value of a home by installing new siding or gutters.
Renovations and repairs to a vehicle or a house increase the chance that someone would buy them for a higher price than if they remained as they were. This is how sweat equity increases value.
Determining your spouse’s sweat equity
Ideally, you would use a prenuptial agreement to make clear that your business and any value it accumulates is separate property. In the event your business does not have this kind of protection, your spouse may lay claim to some of your business value if he or she had contributed any work or duties to your business.
Some couples draft a postnuptial agreement to designate a business as separate property. You might also use a postnup to provide a special payout to your spouse in the event of a divorce. You may also try to appraise the amount of work your spouse has done for your business and buy out your spouse’s interest. Whatever options are available to you will depend on your circumstances.