When one spouse owns a business, or both do, the divorce changes shape. The business is usually the biggest asset, the main source of income, and the hardest thing to value, all at once. This guide explains how Washington courts handle a family business in a divorce. It covers how the business gets characterized, valued, and awarded, and what the spouse who doesn’t keep it receives. It also covers how the business drives maintenance and child support.
We practice family law in Snohomish, Island, King, and Skagit Counties, and divorces involving closely held businesses are a core part of what we do. Over the coming weeks we are publishing shorter posts that answer each of these questions in more depth.
What happens to a family business in a Washington divorce?
The court characterizes the business as community or separate property, puts a value on it, and awards it to one spouse, almost always the one who runs it. The other spouse is compensated with offsetting assets, a money judgment paid over time, spousal maintenance, or a combination. Courts almost never split ownership or force a sale.
Washington is a community property state. At divorce, all property comes before the court, community and separate, and the court divides it in whatever way is “just and equitable” under RCW 26.09.080. Just and equitable does not mean equal. The statute lists four factors: the nature and extent of the community property, the nature and extent of the separate property, the length of the marriage, and each spouse’s economic circumstances when the division takes effect. Character of the property is one factor, not a trump card. In re Marriage of Konzen, 103 Wn.2d 470, 693 P.2d 97 (1985).
Courts avoid leaving divorced spouses as co-owners of anything, least of all an operating company.
Is the business community property or separate property?
A business started or acquired during the marriage is presumptively community property. A business owned before the marriage, or received by gift or inheritance, starts as separate property under RCW 26.16.010. But a separate business that grew during the marriage can carry a community claim, and the owner’s salary history usually decides how big that claim is.
The rules run on two tracks. For an incorporated separate business, the question is whether the owner took a reasonable salary during the marriage. If so, the community was compensated for the owner’s work, and the growth in the stock’s value generally stays separate. That rule dates to Hamlin v. Merlino, 44 Wn.2d 851, 272 P.2d 125 (1954). Underpay yourself, and the community may claim the growth. For an unincorporated business, mixing community labor with business income without keeping the two segregated can make the whole increase community property.
Washington presumes the increase in value of separate property is separate. The other spouse can rebut that with direct and positive evidence that community labor or funds caused the increase. In re Marriage of Elam, 97 Wn.2d 811, 650 P.2d 213 (1982). One more wrinkle: Washington’s cases in this area grew up around corporations and sole proprietorships. For an LLC, the most common form for newer family businesses, courts reason by analogy, which makes the underlying records matter even more.
How does the business get valued?
Through a business valuation, usually by a credentialed appraiser, using income, market, or asset based approaches. The court may adopt either side’s number or anything in between, so long as it stays within the evidence. It must also state on the record how it valued a closely held business. In re Marriage of Gillespie, 89 Wn. App. 390, 948 P.2d 1338 (1997).
Washington values the business to the owner, not to a buyer
One thing sets Washington apart, and it changes the whole case. Most states value a business at fair market value: what a hypothetical buyer would pay. Washington’s cases follow what appraisers call a value to the holder standard. In In re Marriage of Fleege, 91 Wn.2d 324, 588 P.2d 1136 (1979), the Washington Supreme Court set the rule. The question is not whether the business or its goodwill could be sold. It’s whether the business has value to the spouse who keeps it. Washington sits with about a dozen states using this standard, and it tends to produce higher values than fair market value. If your appraiser applies out-of-state assumptions, the number can be wrong in either direction.
Rules that surprise business owners
Two more Washington rules worth knowing. A buy-sell agreement or bylaw price formula does not bind the court, though it can be weighed as a factor. That’s true even for a provision transferring shares at book value with nothing for goodwill. In re Marriage of Brooks, 51 Wn. App. 882, 756 P.2d 161 (1988). The exception ran the other way in Gillespie. There, a locked-in minority interest in an insurance agency was valued at the buy-sell price. The owner realistically could never sell any other way. And the court has discretion over the valuation date: separation, trial, a convenient date between, or the date of distribution. It need not use the same date for every asset.
We wrote a full four part series on the mechanics. The first two posts explain how a business valuation works and the three approaches appraisers use. The last two cover the judgment calls that move the number and how to read the report.
What is goodwill, and why does it matter so much?
Goodwill is the value of a business beyond its tangible assets: the expectation that customers keep coming back. Washington has divided goodwill in divorces since 1976, including goodwill that is personal to a professional and couldn’t be sold to anyone. Most states exclude personal goodwill. Washington does not.
That difference is worth pausing on, because most of what you’ll read online about “enterprise versus personal goodwill” describes other states’ law. Roughly 30 states and the District of Columbia now exclude personal goodwill from the marital estate. Washington sits in the group of about 13 that divide both kinds, under In re Marriage of Hall, 103 Wn.2d 236, 692 P.2d 175 (1984).
Who keeps the business, and what does the other spouse get?
The operator keeps it. The other spouse’s share arrives as offsetting assets, an equalization judgment with interest, maintenance, or some mix. Which mix depends on what else is in the estate and what the business’s cash flow can support.
Offsetting assets. The operator keeps the business; the other spouse receives more of everything else, often the house and the retirement accounts.
An equalization payment. When the other assets aren’t enough, the court enters a money judgment against the spouse keeping the business, payable over time. The judgment bears interest, and the statutory rate applies unless the court enters findings justifying a lower one. This works like a court ordered seller financed buyout. It also mirrors how small businesses actually sell. The usual down payment in a private small business sale is only 20 to 40 percent of the price. The balance gets paid over two to five years.
Maintenance, a sale, and the tax question
Maintenance in place of property. When the estate is too small to compensate the other spouse fully through property, a supplemental award of maintenance is appropriate. In re Marriage of Barnett, 63 Wn. App. 385, 818 P.2d 1382 (1991). Washington courts treat maintenance and property division as two sides of the same coin and must consider them together. In re Marriage of Crosetto, 82 Wn. App. 545, 918 P.2d 954 (1996).
A sale, rarely. Courts can order property sold. In unusual cases a court fixes fractional shares and orders sale within a set period, as in In re Marriage of Sedlock, 69 Wn. App. 484, 849 P.2d 1243 (1993). With an operating business it’s the last resort, because a forced sale destroys the value the court is trying to divide.
One tax note. The court generally won’t reduce the business’s value for the capital gains tax of a hypothetical future sale. Tax consequences count only when a sale is imminent or required by the decree itself. In re Marriage of Hay, 80 Wn. App. 202, 907 P.2d 334 (1995).
How does the business affect spousal maintenance?
Maintenance under RCW 26.09.090 runs on the owner’s real income and the marriage’s standard of living. For a business owner, the same earnings stream drives both the valuation and the maintenance award. That creates the double dip question: is the owner paying for the same dollars twice?
Washington’s leading case answers it with a replacement salary test. A properly built valuation carves a market rate salary out of the earnings before capitalizing anything. The value the other spouse was compensated for never included the owner’s own pay. Maintenance from that pay doesn’t duplicate the property award. In re Marriage of Valente, 179 Wn. App. 817, 320 P.3d 115 (2014). The problem is sharpest in states like Washington that divide personal goodwill. That’s why the replacement salary line in the valuation report deserves more scrutiny than any other number in the case.
How is the owner’s income calculated for child support?
Not from the W-2. Gross income includes income from any source under RCW 26.19.071. For a sole owner, retained earnings can count unless there’s a legitimate business need to keep them in the company. In re Marriage of Stenshoel, 72 Wn. App. 800, 866 P.2d 635 (1993).
Washington’s appellate courts have also held that personal expenses a privately held business pays for the working spouse must be attributed to that spouse as income. In re Marriage of Palomarez, 15 Wn. App. 2d 187, 475 P.3d 512 (2020). Draws, distributions, questioned deductions, and even the decision to leave money in the company all get examined, line by line.
What if my spouse controls the books?
Then the records asked for in discovery and those books will likely need to be analyzed. Washington courts resolve uncertainty about values against the spouse who controls the records and fails to produce them. Business owners who move assets or inflate costs can be found to have wasted community assets.
Uncertainty about value gets resolved against the spouse who holds the records. In re Marriage of Thomas, 63 Wn. App. 658, 821 P.2d 1227 (1991). In re Marriage of Wallace, 111 Wn. App. 697, 45 P.3d 1131 (2002), involved a family construction business. The owner transferred cash and assets to relatives and inflated business costs to lower the company’s value. The court found waste, divided the property accordingly, and awarded the wife her attorney fees. Because the non-owner spouse has a financial interest in the business, a court order compelling production of the business records is nearly always available. Tax returns, general ledgers, payroll, loan applications, and bank statements are how the real income and the real value get established.
What should a business owner do first?
Keep running the business normally. Don’t change your compensation, don’t move assets, don’t start paying relatives. Courts notice, and sudden changes read badly.
Gather five years of records. Business and personal tax returns, financial statements, and bank statements. Every valuation starts there, and the spouse who produces clean records controls the narrative.
Get the valuation conversation started early. The valuation date, the standard of value, and the choice of appraiser shape the whole case, and those decisions happen early. This matters in Snohomish and Island County, where temporary orders are decided by a commissioner on a tight motion calendar. The financial orders entered at the start tend to set the tone for the rest of the case.
If you’re the non-owner spouse, don’t accept the owner’s numbers. The company’s books were kept for taxes, not for measuring value or true income. You have the same right to the records and to your own expert.
Common questions
Does my spouse get half the business? Not the business itself. Your spouse has a claim to a share of its value, and the court decides that share as part of a just and equitable division of everything. The division doesn’t have to be fifty-fifty.
How much does a business valuation cost in a divorce? It varies with the company’s size and the state of its records. A calculation on clean books can run a few thousand dollars. A contested full appraisal can reach well into five figures. Parties often agree to share one joint expert to control cost.
Can we just agree on a value ourselves? Yes, and many couples do, often using a joint appraiser’s number as the anchor. The court still has to find the overall division just and equitable.
Does it matter that the business is an LLC? The framework of the valuation is the same, but Washington’s published cases involve corporations and sole proprietorships, so LLC cases get argued by analogy. Entity records, operating agreements, and compensation history are considered by the court and the expert when the valuation is done on the business.
The posts in this series
The valuation series: How a business valuation works | The three ways appraisers value a business | The judgment calls inside a valuation | How to read a valuation report
More posts in this series are on the way, covering what happens to the business, businesses started before the marriage, buyouts, goodwill, the double dip problem, and a business owner’s income for support. Check back weekly.
Last updated August 2026.
Law Offices of Daniel Ehrlich, Everett. Family law in Snohomish, Island, King, and Skagit Counties. (425) 954-5578.
This article is general information, not legal advice. Every case is different. If you’re facing a divorce involving a business, talk to an attorney.
