How to Protect Your Business during a Divorce
Divorce is one of the most difficult periods in a life of an entrepreneur. If you invested lots of money and spent sleepless hours on developing your company, the fact that your spouse is maybe entitled to 50% of your business will definitely come as a cold shower. Although there are many successful companies that are being run by divorced couples, this definitely doesn’t sound rewarding. In this article we will explain you how to prevent your spouse and his/hers attorneys from taking significant part of your company and how to mitigate legal damage that’s already caused, in case you already entered the process.
Since divorce rate in United States is around 3,6%, there are a many cases where entrepreneurs are forced to share their company’s assets. This can be prevented in several different ways.
Prevention is the best cure
Although most marriages look dreamy in the beginning, entrepreneurs need to think about possibility that their romantic fairy-tale won’t last forever. For protecting their business before the divorce, they should:
- Never mix separate and martial property – If they incorporated and ran their company before they got married
company’s assets will be listed under separate property, which means it can’t be a subject of ex-spouse’s claims. Of course there are certain exemptions from this rule. For example if company increases its assets while entrepreneur is married, the increase is counted as a martial property. Dividing of this property defers between Community Property and Equitable Division states. In Community Property states each spouse is entitled to 50% of martial assets, so if you are for example filing for divorce in California (or Idaho, New Mexico, Nevada, Texas etc.), one half of your company’s business incorporated during your marriage will go to your spouse. Equitable Division states take many different factors in consideration, when deciding on asset division between spouses.
- Prenuptial agreements are great – these agreements represent contracts agreed upon and signed by both parties before or during marriage. They are applicable in both Equitable Division and Community Property states. Prenups need to be written, signed without any coercion and should include all assets spouses own. They also need to be signed in front of a judge or at least two witnesses. For entrepreneurs this is probably the easiest and the least expensive way to protect their business from spouse’s claims. If you didn’t sign a prenup, you can always ask your spouse to sign a postnuptial agreement. These agreements are signed after the marriage and although they are viewed with caution in most states, they at least protect your business in some way. Of course for these kind of agreements you need to offer something in return.
- Pay yourself a competitive salary – if you invest all of your company’s earnings back into the business, your ex-spouse will be entitled to much bigger share of it, because your household didn’t derive any benefit from your work.
- Partnerships, buy–sell agreements etc. – most of these agreements make sure that your spouse won’t sell his/her share after the divorce, because they prohibit transfer of shares without an approval of other shareholder.
If you were a hopeless romantic…
If you weren’t able to protect your company shares before or during your marriage and your spouse receives his/her share after the divorce there are several ways you can pay off your dues and continue running your business in a normal way.
- You can compensate your company’s shares with other types of assets like: real estate, car, shares in other companies, retirement funds, cash, etc.
- Signing a Property Settlement Note allows you to payout his/her share on the long term, with interest of course.
- Selling your business, dividing the money and incorporating a new company in the same niche is your last option, but you should think about it only if there’s no other way.
Although prenuptial agreements can anger your fiancé and make your wedding and honeymoon trip much less romantic, this is by far the best way to protect your business and enjoy fruitful and harmonious marriage for years to come