Redemption of Spouse's Stock in Closely Held Business: Divorce

A stock redemption occurs when a shareholder sells stock back to a corporation. Unlike a complete liquidation, the corporation generally continues to exist after the transaction. In a divorce context, if either spouse owns a closely held corporation, that business will probably be a part of the property division. Clearly, the business will be considered marital property if it was started during the marriage with joint funds. If the business was started prior to marriage or financed with separate funds, however, it is necessary to consult state law to determine the rights of the other spouse. And although the rules will vary from state to state, most states mandate that a portion of the business will be considered a marital asset.

For instance, the marital portion might be the amount of joint funds used to expand an existing business (plus the appreciation attributed to that contribution). Or, the nonowner spouse may have helped operate the business, and that assistance may have contributed to the growth of the business during the marriage. Because each spouse will probably have a stake in the business, it is typical, in divorce situations, for one spouse to buy out the other's share or to trade assets of equal value for that share.

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