Liability of a lease

[jkwheel1]

What is the name of your state (only U.S. law)? IL
I am seeking a divorce. My wife is the sole proprietor of a retail business. When we met she had owned this for 2 years. Since then I have co-mingled funds, filed joint tax returns but have never been and owner. My question is; She renewed her lease after we were married, am I held financially responsible if she were to default?

Thank you

 

[mistoffolees]

What is the name of your state (only U.S. law)? IL
I am seeking a divorce. My wife is the sole proprietor of a retail business. When we met she had owned this for 2 years. Since then I have co-mingled funds, filed joint tax returns but have never been and owner. My question is; She renewed her lease after we were married, am I held financially responsible if she were to default?

Thank you

You're going to be liable for 1/2 of all marital debts and assets. If you filed a joint tax return on the business, the business is clearly a marital asset at this point (she can probably exclude the value at the time of the marriage, though). Any obligations taken on after the marriage are 1/2 yours.

 

[nextwife]

How is the business operated? Is it under a Corp or LLC? Is the lease personally guarantied or made to the business?

 

[LdiJ]

You're going to be liable for 1/2 of all marital debts and assets. If you filed a joint tax return on the business, the business is clearly a marital asset at this point (she can probably exclude the value at the time of the marriage, though). Any obligations taken on after the marriage are 1/2 yours.

I am not sure that I agree with this. Yes, a business (in its entirety) can be marital property or partially marital property, but that is the business as a whole, not the individual debts and assets of the business.

I don't see how he could be held responsible for her business lease, unless he was a cosigner to the lease.

Since she started the business prior to marriage, she is naturally going to retain ownership of the business (possibly being required to buy out any marital share he might have, assuming that the business accrued value during the marriage, which it possibly did not).

However, whoever keeps possession of an asset (in this case the business) also is responsible for the debts associated with that asset. Its no different than a house or a car.

 

[nextwife]

However, whoever keeps possession of an asset (in this case the business) also is responsible for the debts associated with that asset. Its no different than a house or a car.

Yes and no. Whomever keeps the asset may agree to be responsible, but any entity that lent to BOTH parties when they underwrote and granted the loan to BOTH, can still hold BOTH responsible. And too few family law attorneys bother to explain this fact.

 

[LdiJ]

Yes and no. Whomever keeps the asset may agree to be responsible, but any entity that lent to BOTH parties when they underwrote and granted the loan to BOTH, can still hold BOTH responsible. And too few family law attorneys bother to explain this fact.

Absolutely...if he cosigned the lease the lessor can hold him responsible for the lease....and absolutely too few family law attorneys explain this fact.

In my opinion, the reason why they don't explain this fact is because they are not experts on that aspect of law...or because they just want to "get the deal done".

 

[mistoffolees]

I am not sure that I agree with this. Yes, a business (in its entirety) can be marital property or partially marital property, but that is the business as a whole, not the individual debts and assets of the business.

I don't see how he could be held responsible for her business lease, unless he was a cosigner to the lease.

That's splitting hairs a little too fine. If the business is partially marital property and the business owes money, then it will affect what he gets. The value of the business includes the assets minus the debts. The greater the debts, the less he will receive.

The only ways he would not be impacted by the debts are:
If the business value is less than zero. The business has no value. She could ask him to put up some of the difference, but he could respond that the business has no value and should be closed and I doubt if he'd have to pay anything.
2. If the business is a C- or S-corp and the stock has always been in her name and no marital funds were ever invested into the business.

In the majority of cases (most businesses are never incorporated), he's going to be responsible for half of any debts incurred during the marriage.

But you're right that no definitive answer is possible until he provides more details about the structure of the corporation.

 

[LdiJ]

That's splitting hairs a little too fine. If the business is partially marital property and the business owes money, then it will affect what he gets. The value of the business includes the assets minus the debts. The greater the debts, the less he will receive.

The only ways he would not be impacted by the debts are:
If the business value is less than zero. The business has no value. She could ask him to put up some of the difference, but he could respond that the business has no value and should be closed and I doubt if he'd have to pay anything.
2. If the business is a C- or S-corp and the stock has always been in her name and no marital funds were ever invested into the business.

In the majority of cases (most businesses are never incorporated), he's going to be responsible for half of any debts incurred during the marriage.

But you're right that no definitive answer is possible until he provides more details about the structure of the corporation.

A business, even a sole proprietorship is still an "entity". It may be a disregarded entity for tax purposes but its still an "entity"...an asset.

If someone keeps the marital home, and the mortgage is upside down, the courts don't order the person not keeping the home, to pay a share of the mortgage indebtedness...at least, I have never seen that happen.

Its no different here. If he didn't cosign the lease he is not going to be held responsible for the lease.

 

[mistoffolees]

A business, even a sole proprietorship is still an "entity". It may be a disregarded entity for tax purposes but its still an "entity"...an asset.

If someone keeps the marital home, and the mortgage is upside down, the courts don't order the person not keeping the home, to pay a share of the mortgage indebtedness...at least, I have never seen that happen.

Its no different here. If he didn't cosign the lease he is not going to be held responsible for the lease.

That's essentially what I said. If the business is 'upside down' (debts greater than assets), then he's not going to owe anything.

If there's equity in the business, the equity will be determined by taking all assets and subtracting all debts - including the lease. He's going to get his share (whatever that might be) of what's left. In that case, the lease DOES cost him - even though he doesn't personally have to pay it.

 

[LdiJ]

That's essentially what I said. If the business is 'upside down' (debts greater than assets), then he's not going to owe anything.

If there's equity in the business, the equity will be determined by taking all assets and subtracting all debts - including the lease. He's going to get his share (whatever that might be) of what's left. In that case, the lease DOES cost him - even though he doesn't personally have to pay it.

Actually, that is not how businesses are normally valued. However, I do see your point. He might get less of a "marital share" of her business, because the business has a lease. However, any bricks and mortar business is going to have a lease, (unless they own their own building) therefore this is very common. Its a natural expense/debt of just about any business.

 

[mistoffolees]

Actually, that is not how businesses are normally valued. However, I do see your point. He might get less of a "marital share" of her business, because the business has a lease. However, any bricks and mortar business is going to have a lease, (unless they own their own building) therefore this is very common. Its a natural expense/debt of just about any business.

Yes, except that he was worried about signing the lease. That made it sound like they had an option not to sign a lease (month to month rental perhaps or maybe they were working out of their home).

And I'm quite aware that that's not how businesses are valued, but any liabilities do have an impact on the overall value.

 

[LdiJ]

Yes, except that he was worried about signing the lease. That made it sound like they had an option not to sign a lease (month to month rental perhaps or maybe they were working out of their home).

And I'm quite aware that that's not how businesses are valued, but any liabilities do have an impact on the overall value.

It may vary from state to state, but I have never seen a month to month commercial lease, unless its an unusual situation. Most of them in my state are 3 - 5 years long.
My boss does rent some commercial space in our same strip mall (large one) every year for a couple of months during the tax season, for our tech guys, but its whatever unit happens to be empty at the time.

In any case, what he said was "she renewed her lease after we were married". Therefore I do not believe that he signed it, and its obviously a done deal.

His actual question was if he would be held reponsible for the lease if she defaults. The answer to that is if he did not sign the lease, he can't be held liable. However, if he did sign the lease, he could be in a world of hurt.