Is Your Business Divorce Proof?
Posted on October 14, 2016 by Lioness Staff
You’re the entrepreneur—this business is your baby. You started it, grew it, and it should be yours. Right? Unfortunately, if you don’t structure things right, if you end up divorcing things may not turn out so well. Your spouse may end up with as much as half of it, even if he didn’t do any of the work in the business.
We always expect and hope our marriages will last forever, but unfortunately things don’t always work out. And just think for a moment what would be most important for you to hang onto after the divorce. The kids, obviously, but what else? Definitely maintaining control of your business. Maybe you are thinking that your marriage will be fine—but just remember how many marriages end in divorce. If your business is worth millions by then, things could get ugly. For the interest of your business—and your sanity—take some time to take care of this.
The number one thing you need to do is talk to a lawyer, and do it now. A lawyer is the best person to guide you through the hoops of keeping your business in the event of a divorce.
If you are not yet married, then when the time comes involve your lawyer and set up a prenup. The pre-nup will state in writing all the legalities to ensure the business will always be yours, if the marriage were to end. A pre-nup is the least complicated and least expensive way to protect your business. Some potential spouses feel a little put out by a pre-nup, but just explain that it’s a business transaction your lawyer recommends. Be sure to ask your lawyer if anything after the marriage could nullify or cause exceptions to your pre-nup.
Also, now and in the future, always keep your business finances separate from your household finances. It will make things a lot easier all the way around. That means separate accounts but also not borrowing from household to pay business expenses.
If you are already married and things are good in your marriage, it’s still important to take some steps now to protect your business and make it just yours. Even if nothing is amiss, making sure that your business is truly yours now and in the future—when a marriage is involved—can take years. So take the time to protect yourself before anything (heaven forbid) happens.
A postnup document can take care of that most of the time; talk to your lawyer about what is possible and all the details. A postnup is quite similar to a pre-nup but can take a bit of extra work. Again, look at it as a smart business transaction that will alleviate your worries and allow you to feel better about your business.
It’s important to know that everything is subject to your individual circumstances, and some laws vary from state to state. So talking to a lawyer is key in knowing all of the intricacies of what will apply to you. Some states are Community Property states, which tips things in favor of the spouse getting a share of the other’s business. So check to see if your state is on that list.
In general terms, you are pretty safe if your business falls under a category that deems it separate. That is typically when a business: belonged to you (and not your spouse) before marriage, or was inherited gifted only to you.
But even then there can be exceptions, or things can get complicated if things get shifted around. Like if your business gained value during a marriage, it could possibly be looked as not being separate anymore—it could be deemed marital property and need to be split. Also, if you don’t pay yourself a competitive wage from your business earnings, your spouse could use that against you, saying that the money you re-invested into the business should have gone to your household instead.
One solution could be to place your business within a trust; it means you no longer personally own it, which means it can’t be counted as a marital asset. If you aren’t able to do so, then if you are having to divide assets and want to keep your business, see if you are able to offer your ex other assets like retirement accounts, the house, etc., in lieu of a piece of the company. Double check that a third-party valuation is being done fairly—it should be an estimate of the company’s current value, not its future value.
Spouse Involvement in Your Business
All of the above can work out fairly well for you to keep your business in the event of a divorce. That is, unless your spouse is somehow involved in your business. Then things can get a little tricky.
If you are partners, or your spouse contributes quite a bit of time and effort into your business, then he may be entitled to a specific percentage if you later divorce. In this case, there isn’t a lot you can do to maintain separateness and claim the entire business as your own.
However, if you don’t want to keep working with your spouse after your personal relationship ends, you can buy out their portion of the business. You can use assets you gain from the divorce, sell the business and split the money and then start a new business of your own, or you can negotiate a long-term pay out. Again, talk to your lawyer about specifics.
The key is in business—as in marriage—is to plan for the worst (as far in advance as possible), and hope for the best. Either way, if you take steps now to protect your business, you will have better peace of mind. That means you can concentrate more on the work at hand.
Sylvia Smith is a relationship expert with years of experience in training and helping couples. She has helped countless individuals and organizations around the world, offering effective and efficient solutions for healthy and successful relationships. Her mission is to provide inspiration, support and empowerment to everyone on their journey to a great marriage. She is a featured writer for marriage.com, a reliable resource to support healthy, happy marriages. Follow her on Facebook, Twitter, StumbleUpon, Google+ and Pinterest.