How to protect your business from a divorce
No one wants to think that the person to whom they have committed a significant amount of their life would end up coming after a business asset in a divorce. The reality is, it happens more often than not.
Understanding how to protect that business from the legal realities of divorce can be the difference between keeping it, or having to close up shop. A formal agreement—either a prenuptial agreement (drawn up and executed prior to your marriage date) or a postnuptial agreement (executed after marriage)—can help facilitate a resolution and ease anxieties for both parties at a time when emotions are likely to be running high. You can document guidelines regarding issues ranging from how the business will be valued (there are a broad range of appraisal methodologies) to how its assets will be divided.
The best option for planning how your business will be impacted by a divorce is by far a prenuptial or postnuptial agreement. These agreements are contracts that have very specific requirements to be enforced by a court in the event that you and your spouse split. These documents can ensure:
That your business is your separate property and, therefore, not subject to division. This would save you from a potentially costly, lengthy and invasive valuation that could involve examining the books, inspecting the location and interviewing employees.
That any value added to the business after your marriage date will be marital property. You might choose to limit the nontitled spouse’s share to a percentage lower than what they may receive in other marital assets—e.g., although other marital assets might be divided equally, a nontitled spouse may receive only 5% of the business’s value accumulated during the marriage.
Which spouse would buy the other out in the case of divorce, if your business is an equal partnership. Or, maybe you’ll decide that you can continue to work together and maintain the business partnership in spite of marital separation.
While certainly not advisable, there are steps you can take absent a prenuptial or postnuptial agreement to protect your business interests. For example, you can:
Establish yourself as the sole owner of your business, and make sure that the organizing documents for the business clearly specify that the business cannot be transferred in the event of a divorce, in which case a cash award may be made to the nontitled spouse.
Keep clear records of the sources of capital for the business—i.e., were premarital or marital monies used to set up office space, pay rent, etc.?
Keep your business and personal expenses separate. If you’re making $200,000 but run $500,000 of personal expenses through your business, then your actual income, as well as the valuation of the business, may come under scrutiny. Untangling commingled funds adds unnecessary complexity for your advisers and could be detrimental to your settlement.
If there is a cash component to your business, make sure all cash transactions are well-documented.
Understand the potential consequences of paying yourself an income that is inconsistent with market standards. For example, if the going rate for your position in your industry is $200,000 but you’re paying yourself only $85,000, your spouse could assert that the full $200,000 should be imputed to you as income for purposes of determining support.
If your spouse works at your business, even in a minor capacity, pay her or him market rates for their services. Otherwise, she or he may seek a higher percentage of the company’s value, arguing for a more equitable distribution given her or his contribution to the business’s value.
Reczek Chase handles a wide range of family law issues and can assist in resolving these issues before they become adversarial. If you’d like to discuss how your business may be impacted by a divorce, you can set up a time to chat with our attorneys by following this link, or call us at (502)653 7455.
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information.