Financial Divorce SolutionsDividing a business owned by one spouse can add a level of complexity to a divorce. If the business is considered marital property or a portion of it is marital property, the value of the business must be determined and divided between the parties.
The first step in dividing a business is to determine an accurate valuation of the business.
How Do You Deal with a Business in a Divorce?
Once the business valuation is completed, the parties must decide how they want to deal with the business. For example, the business can be sold and the proceeds divided between the parties or the parties can decide to continue to operate the business jointly following their divorce.
If one party wants to keep the business and the other party does not, the party who wants to keep the business can buy out the other by compensating him or for the value of the interest in the business or by giving that party equal value in other marital property, such as the marital home.
Why Divorce is Different for the Small Business Owner
In a perfect world, small business owners don’t have to worry about their businesses being vulnerable to asset division during divorce. And even though the divorce rate is falling, divorce is still common and complicated, especially when it comes to dividing the estate. So what can be done to protect your most important asset? The following tips will help you protect your business in the event of divorce.
Protect Your Business ASAP
The best way to protect your business from becoming part of a divorce settlement is to protect it before you get married, but even if that isn’t possible, the discussion of how to protect the business needs to happen well before any hint of divorce. This is a difficult conversation to have with your spouse-to-be, but it can be framed as a way to ensure the stability of the lives your business impacts, such as investors, employees, or customers. Give your partner the sense that you have responsibilities that need to be protected from possible instability in the future.
Don’t Go It Alone
Seek the advice of a legal expert. A lawyer can help you make sure that your business is protected, and he or she can take into account differences in the laws from state to state. Many factors come into play when determining who is entitled to what part of a business after divorce, and a lawyer can help frame a plan that is informed by all these complexities.
For instance, your spouse having a substantive role in the day-to-day operations of your business will require a different settlement plan that one in which the spouse has little to no role. If you’re unsure where to start in choosing a lawyer for advice, ask whom other business professionals recommend.
The Importance of Prenups
Prenuptial agreements are seen as controversial and predictive of trouble to some. However, these agreements can ensure that both parties enter into a marriage with their financial interests being protected. A prenup gives a roadmap for how assets, income, and property will be divided in the event of divorce. Without such agreements, these all become subject to be distributed according to the court’s determination. One way to look at prenuptial agreements is that it allows both parties to be in total control of their lives as they separate in the same way that they control how their lives form as they join.
Prenuptial agreements can be complicated. They require certain criteria to be met, such as full disclosure of assets, and they must be made without either party feeling coerced. For this reason, both individuals should have an attorney working with them to make sure that they are equally represented and that all factors are clear before signing this binding agreement.
Although this route requires difficult discussions before marriage, it can definitely be worth it to avoid adding stress to an already emotionally fraught situation.
Late Better Than Never
If prenuptial agreements are no longer possible, you may be able to draw up a postnuptial agreement. Postnups aren’t as ironclad as prenups, and some states don’t recognize them. In fact, many postnups are used to inform prenups as situations change throughout marriage to reflect children, new businesses, and other financial changes.
Beyond Nuptial Agreements
Now if neither a pre- or post- nuptial agreement is a viable option for your situation, there are other ways to put protection in place before divorce. Shareholders, partnerships, and LLCs allow businesses to be set up in such a way to protect the interests of the non-divorcing parties. Some of the ways to ensure protection is for the business to require prenuptial agreements that protect the business from being vulnerable due to one owner’s divorce.
Agreements can be put in place that require a spouse-to-be to sign an agreement that prevents them from compromising the integrity of the business in the event of a future divorce. Share transfers, or other such transfers of ownership/power, can also be required to be approved by other owners/partners in the event of divorce.
Also, paying oneself a competitive salary is an important step, so that the spouse cannot claim that business income wasn’t contributing to the household.
Keeping Track of Property
As you probably know, some property is considered marital property, and other property is considered separate. An inheritance or gift given to only one spouse, a business or property acquired before a marriage are considered separate property. However, as a marriage progresses, separate property can easily shift from separate to marital property, so vigilance must be exercised.
Everything acquired during the marriage will be considered marital property and will be divided as such, especially without the existence of a prenuptial or postnuptial agreement. One thing to keep in mind is that value accrued during the tenure of the marriage is most generally considered marital property.
Location, Location, Location
Divorce laws differ significantly from state to state; thus, any agreements made with regard to the division of marital property need to be updated if the location of residence changes. In fact, a few states simply divide all marital assets 50/50 no matter the circumstances of the divorce or marriage. Such states are called Community Property states.
Ideally, and as is most common, you and your spouse will be able to reach an agreement as to how your marital assets will be divided and avoid a confrontation in court. However, if you cannot reach an agreement with the help of your lawyers and mediators, you may go to trial, where a judge will decide how to divide your assets using Equitable Distribution.
A judge will look at a number of variables in determining who should get what in a settlement—this could be each spouse’s income, businesses, their education, their ability to support themselves, and other considerations. The judge basically has the power to determine how your assets should be divided.
Small business owners should take care to protect the time, work, and money they’ve invested in building a successful venture by making smart decisions when getting married and (hopefully not) divorced.
If you are a business owner or are divorcing a business owner there are many special considerations for how to handle the business and income. We help you find the best possible solution for your divorce.