You’ve worked diligently to build a successful business. A divorce could mean your business must be divided or even possibly sold. After all the sweat equity and calculated decisions you’ve made to achieve success, letting go of your business is not an option. With careful planning, you can protect your business from divorce.
Marital vs. Non-Marital Assets
One of the key factors involved in how your business will be disposed of during your divorce is when you acquired or established the business. Separate property is property that was acquired before the marriage. It is not divided in the divorce (unless the other spouse contributed to the growth or upkeep of the asset during marriage).
In the case of a business, it would remain separate property unless you gave your spouse an ownership interest or used marital funds to expand the business. However, if the business was begun or bought after the marriage, then in most cases, it is considered a marital asset and will be divided in the divorce.
Prenuptial or Postnuptial Agreements
The very best way to protect your business in a divorce is to create a prenuptial or postnuptial agreement with your spouse. A prenuptial agreement is created before the marriage while a postnuptial agreement is created after the marriage. Both serve the same purpose: to delineate how the couple’s assets will be divided in the case of a divorce. These agreements can be used to specify ownership in a business and ensure that it will not be divided should the couple divorce. If you have a privately owned business, a prenuptial or postnuptial agreement is absolutely crucial for protecting your livelihood and financial interests.
Many couples make the mistake of not having a prenuptial agreement when they marry because they start their marriage as young people with few assets. A business that starts as a small home business can bloom and grow over the years of a marriage, becoming a multi-million dollar business eventually. In this situation, entering into a postnuptial agreement during your marriage is a wise way to protect your business as it grows.
Proactive Steps to Take to Protect Your Business
Before you face divorce, there are things you can do that will help shield your business from a future divorce. These are also things that simply make good business sense and will benefit you even if you do stay married for the rest of your life.
Maintain a Complete Separation Between Personal and Business Finances
Once you start creating fluidity between the two, such as moving some money from your savings account into your business account, you’re blurring the lines between business and marital finances. For example, it’s common to pay some household expenses through your business. This can be infinitely dangerous to your position should you divorce or borrow money from your savings when your business needs it. If you need a cash infusion, do it formally. Keep meticulous records for both business and marital finances.
Formalize Your Business Ownership
Instead of operating as a sole proprietor, formalize your business as an LLC or corporation so there is formal ownership that is clearly yours.
Pay Yourself a Reasonable Salary
If you keep your salary to a minimum in order to build up your business, there may be an argument to be made in divorce that you purposely kept funds out of the marriage to build up the value of your separate business asset. Set your salary to what is considered fair in your industry, and remind yourself that doing so is an investment in keeping ownership of your business separate.
Do Not Hire Your Spouse.
As tempting as it may be to bring your spouse on board and work together, doing so simply increases the chances that your business will be viewed as marital property and divided in the divorce.
Protective Steps to Take Once Divorce is Inevitable
Once it seems that your marriage is headed for divorce or divorce or separation papers have been filed, there are steps you can take that will protect the business as you go through the divorce.
Fire Your Spouse
It’s common for a spouse to be given a role in the other spouse’s business. The extent of that role can vary greatly, but once you decide to divorce, continuing to have your spouse involved in the day-to-day operations of your business can feel intrusive and can exacerbate conflict. However, firing your spouse can be challenging. If the spouse is an officer or director and has not conducted themselves improperly, it can be very difficult to fire them. However, if a spouse is an at-will employee without ownership, you can release them from their position.
Obtain A Fair Valuation
Should you divorce and the business is a marital asset, the most important thing you can do is make sure that the court's valuation is fair and accurate. Work with your attorney to ensure that a valuation expert is used who has significant experience in your particular industry. There are a variety of business valuation methods that can be used. It’s important to talk with your attorney about these options because some will be more advantageous to your position than others and can have a significant impact on the total valuation and thus on the division of the business by the court.
Pay Over Time
If the court determines that you must buy out your spouse’s interest in your business, be sure that your attorney arranges a long-term payment schedule. Gradual payment will give your business time to handle the payout.
Make Trades
If it comes down to keeping the business or giving up other marital assets in the divorce, let the other assets go so that you can keep the business. Your business will continue to grow and increase your wealth in the years to come. You can buy another house or vacation home, but recovering from buying out your spouse from your business or selling your business can be an insurmountable challenge.
Your business is not only crucial to your financial well-being but is also representative of your hard work and ingenuity. Ensuring that your company is protected should you divorce is smart business.