The best strategy for sheltering your business from a divorce is to act before you are even in a relationship or when things are still going well between you and your partner. If you and your spouse are entertaining the idea of decoupling it might very well be too late to take any protective measures. Your marriage partnership might be at risk of falling apart, but that should not mean that your business needs to. Just as insurance policies are designed to protect you and your loved ones from unexpected situations, the suggestions below are designed to protect your business interests in case of divorce
Leave it to the Professionals
Every divorce is different; the size of your business, which state it operates in, the type of business, the reasons for your divorce, and so many other factors make it critical for you to have a team of (at least) a lawyer and divorce financial advisor guiding you, preferably a Certified Divorce Financial Analyst (CDFA). Even if your partnership was never recognized by the state where you live and/or operate your business, it is important to have knowledgeable and divorce specialized professionals helping you disentangle the decoupling from your business.
Location, Location, Location
You probably thought a lot about where exactly you wanted to set up your business. The same should hold true about where you decide to go through with your divorce. Have your professional team explain how your assets, income, and small business would be viewed in the eyes of your state so that you can know exactly which of these tips make the most sense for you. Community Property States (of which there are only nine in the U.S.) consider each spouse an equal owner of all marital property. Thus a judge could simply halve all assets, with no regard for fairness. Most other states use Equitable Distribution rules, giving a judge considerable discretion as to what equitable means. Equitable does not always equate to fair control of your assets, including your small business. Factors like the duration of the marriage, financial condition of each partner, your age and health, and even how much education you have are weighed in determining the final settlement.
Pre and Post Nuptial Agreements
Acknowledging that your marriage might end even before it starts might seem a bit awkward. But a respectful discussion and a bit of formal planning before you tie the knot can save you and your business significant financial hardship and frustration later. Decisively itemizing from the very beginning which properties will be separate, and which will be marital, is the ideal.
According to Allianz’s 2019 Women Power Money Study, women are 38% more likely to own their own business than just ten years ago. Similarly, as the age of marriage increases for most women, they enter the union with more assets and property that need to be protected. A common way of shielding these personal and business assets from harm is by signing a prenuptial agreement (prenup). Having a binding prenuptial contract in place before the wedding means that you know exactly what will happen to all assets, property, and income in the event of divorce, separation, or death.
If for some reason you don’t want to sign a prenup, you should consider a postnuptial agreement (postnup). Essentially the same as a prenup, with all the same critical information about assets and property, this agreement is signed after marriage. They are best used to update a prenup when your financial situation changes as a result of business growth, inheritance, wealth, or anything else.
Regardless of which route you choose, these contractual arrangements should define things like:
- If your business is an equal partnership, which spouse would buy the other out in the case of divorce. Or perhaps you state that you plan to continue working together and maintaining the business partnership despite your marital separation.
- Your business is separate property and, therefore, not subject to division. This would ensure that, in case of divorce, your business would not be subject to expensive, long, and invasive evaluations.
- Defining your marriage date as the initiating period for any value added to the business. You can also limit your spouse’s share in the business so that future earnings don’t need to be split equally.
Be the Boss
Formally establish yourself as the sole owner of your business and ensure that all the company documents state that. Similarly, clearly specify that the business cannot be transferred in the event of a divorce, and a cash payout might be awarded to your ex. You can also establish yourself as an LLC or define a protective business structure which will name you as the owner and define parameters in the case of a divorce.
Set Clear Boundaries
Make sure that you maintain records of the sources of capital for your business. Know exactly which premarital or marital funds were used to do what, etc. Keep the books for your business separate from your personal banking system. Running personal expenses through your business will mean that your actual income, and the valuation of the business, will be scrutinized in the divorce. Untangling entwined funds makes it unnecessarily complicated for your advisers.
If your spouse is employed by your business in any capacity, make sure they are paid market rates for their services. Otherwise, they are likely to seek a higher percentage of the business’s value, based on the argument that their underpayment entitles them to an equitable distribution given their contribution to the venture’s value.
The good news is it is rare for a business to be sold to satisfy a divorce settlement. This means that your professional venture, the organization you put so much of yourself into, does not have to dissolve along with your marriage. Remain positive and respectful throughout all the proceedings and you will likely reach a mutually satisfactory agreement that will allow you and your business to move forward.