How to Buy Out Your Spouse’s Share of a Business
A spousal buyout has three parts. Agree what the business is worth, agree the share your spouse is owed, then pay for it.
You can pay with other assets, cash, or payments over time. Most owners use two of the three.
The deal goes into your divorce settlement, and the ownership papers get updated. Start with the divorce buyout calculator for a value range and the share in dollars.
- Agree on the value and the share first. Use an appraisal or a number you both accept, then apply your state’s property rule.
- Pay with other assets, cash or a note. Most owners combine two or three.
- The transfer itself usually isn’t taxed. Section 1041 of the Internal Revenue Code covers transfers between spouses in a divorce.
- What are the steps to buy out a spouse's share of a business?
- How can I pay my spouse for their share of the business?
- Is a spousal buyout taxable?
- What paperwork do I need for a spousal buyout?
- Common mistakes in a spousal buyout
- What if I can't afford to buy out my spouse?
- What to do next
- Frequently Asked Questions
What are the steps to buy out a spouse’s share of a business?
A spousal buyout follows the same six steps in almost every state:
- Agree on the value. Use a formal appraisal, or a number you both accept. If you can’t agree, each side hires an appraiser and the court decides.
- Agree on the share. In the nine community property states, the marital part of the business is usually split 50/50. Elsewhere it’s divided fairly, which isn’t always equally. If you owned the business before the marriage, only part of it may be marital.
- Subtract the debt. Business loans, lines of credit and unpaid taxes reduce what the share is worth.
- Choose how to pay. Offset with other assets, pay cash, or pay over time, as covered below.
- Write it into the settlement. The marital settlement agreement or court order states the price, the payment terms and what happens if a payment is missed.
- Transfer the ownership. Sign the stock or membership-interest transfer, update the operating agreement or bylaws, and file any changes your state requires.
How can I pay my spouse for their share of the business?
Most owners combine two or three of these payment methods:
| Method | How it works | Watch out for |
|---|---|---|
| Offset with other assets | Your spouse takes more of the house equity, retirement accounts or savings, and you keep the business. | A dollar in a retirement account isn’t worth a dollar in cash after taxes. Compare them after tax. |
| Cash at closing | You pay from savings or a loan. Business acquisition loans, including the government-backed 7(a) program, can fund a change of ownership. | The loan payment comes out of the same profit the business value was based on. |
| Payments over time | You sign a promissory note and pay in installments with interest. | Your spouse carries the risk if the business struggles, so expect them to ask for security, such as a lien on the business. |
| Mix of the above | Part offset, part cash, part note. | Spell out each piece in the settlement so nothing is left open. |
Is a spousal buyout taxable?
A transfer of business ownership between spouses as part of a divorce is generally not taxed. Section 1041 of the tax code covers it.
You take over the business at its existing tax cost, so the gain waits until you sell. The IRS sets out the same rule for property settlements in Publication 504.
Interest paid on a buyout note is taxable income to the spouse who gets it. Have a CPA review the terms before you sign.
What paperwork do I need for a spousal buyout?
- The marital settlement agreement or court order with the price and payment terms.
- A stock assignment or membership-interest assignment transferring your spouse’s ownership to you.
- An updated operating agreement, bylaws or shareholder records.
- A promissory note and security agreement, if you’re paying over time.
- Lender and landlord consents, if your loans or lease require them.
- Releases from personal guarantees, if your spouse signed any for the business.
Common mistakes in a spousal buyout
- Leaving your spouse on personal guarantees. If they guaranteed a loan or lease, they stay on the hook until the lender or landlord releases them. Get the release, or refinance.
- Paying over time with no security. An unsecured note is easy to agree to and hard to collect.
- Forgetting the debt. Sale values assume the business is sold free of debt. Subtract the loans before you agree on a price.
- Skipping the ownership transfer. If the records still show your spouse as an owner, you’ll have trouble selling or borrowing later.
- Paying for the same income twice. If support is also based on the business profit, raise it with your attorney. States handle this differently.
What if I can’t afford to buy out my spouse?
If you cannot fund a buyout, the usual answer is to sell the business and split the proceeds.
That also settles the value question, because a real buyer sets the price.
Read whether you can sell your business before or during a divorce, or list your business free with Deal Prospectors.
What to do next
- Run the divorce buyout calculator for a value range and the share range.
- Gather three years of tax returns, profit and loss statements and a list of business debts.
- Ask your attorney which property rule your state uses. See community property vs. equitable distribution for business owners.
- Ask a CPA to compare the after-tax cost of each payment method.
Frequently Asked Questions
Usually as long as the divorce itself, because the buyout is part of the settlement. The valuation is the slow part. Expect a few weeks for an appraisal, longer if each side hires their own and the numbers are far apart.
Sometimes, through a loan or a redemption by the company. Both change the tax picture and can undo the protection of section 1041, so ask a CPA first. Taking cash out as a draw is simpler but lands the tax on you.
Whatever you agree, but set it at a market rate. A rate well below market can be recast by the IRS, and a rate well above it is money you did not need to pay. Put the rate, the term and the security in writing.
Not always. One joint appraiser is cheaper and faster, and many couples agree to it. Two make sense when the business is large, or when you expect the number to end up in front of a judge.
This page is general information, not legal, tax or financial advice. Divorce and property rules vary by state and change over time. Talk to a family law attorney in your state before you make decisions.