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The Divorce Encyclopedia

Term Definition Corporation - an artificial person usually created for business.
Application in Divorce Black’s Law Dictionary defines a corporation as "[a]n artificial person or legal entity created by or under the authority of the laws of a state." A corporation is an association of people created as a legal entity; a fiction of law that can sue and be sued, which survives the death of the individuals who own it and who are called shareholders. Black’s continues: "Such entity subsists as a body politic under a special denomination, which is regarded in law as having a personality and existence distinct from its several members, and which is ... vested with the capacity of continuous succession ... either in perpetuity or for a limited number of years..."

As law students joke, "a corporation can’t vote and does not die."

Divorcing spouses may jointly or separately own stock in a publicly traded company that may be subject to distribution. Determining the value of these assets rarely poses a problem.

A corporation may be modified to special forms, including but not limited to, professional corporations of lawyers and doctors. Professional corporations are usually closely held, which means its stock is owned privately as opposed to one traded publicly on an exchange.

A closely held corporation is the same as a private company, and determining the value of these entities can be much more difficult.

In divorce, these entities must be appraised by various experts who use different methods to place a value on the corporation for purposes of marital distribution. Many factors -- including fair market value versus fair value, goodwill, salaries versus distribution of profits, return on capital -- make this calculation difficult and subject to dispute in divorce actions.

The problem of appraisal is made more complicated because very often these corporations may be both marital and separate property and have appreciated actively and passively. For example, before he married Rhonda, Rufus started a custom surf board company with funds he inherited when Uncle Ray died. Rufus worked hard and the business took off. Shortly after he married Rhonda, Rufus took in partners and reorganized as a private corporation, R & R Surf Boards. After they were married, Rhonda worked as a secretary and after Ronald and Roda arrived, a part-time and unpaid receptionist. During the happy times of their marriage, Rufus and Rhonda invested gifts they had received jointly, and during a lean period, Rhonda contributed funds she had received as a gift. Still later, Rufus and his partners bought the office they formerly rented, and made two major additions to the plant. Thus, the value of R & R actively appreciated. R & R. Surf Boards had the good fortune to be in a part of town near where the highway department planned a major highway, which means the value of the assets appreciated passively. During his years, R & R became known as the Mercedes of surf boards, and the company could hardly keep up with business. That increased its goodwill.

Rufus and his partners were thinking about taking the company public about the time Rufus and Rhonda came to the end of the road as a couple. When Rufus and Rhonda parted, dividing his share of R & R will be very challenging. That share is now both martial and separate property of both of Rufus and Rhonda. Both had made contributions, economic and noneconomic, to the prosperity of R & R Surf Boards.

One veteran divorce lawyer says of the complexities of these valuations, "You cannot approach this issue yourself."

See Fair Market Value, Fair Value, Goodwill; Active and Passive Appreciation.

See also Marketability Discount and Minority Discount.

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