How to Protect Your Business in a Divorce

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By using a prenuptial agreement, the parties can decide in advanced what property will be considered separate property and what property will be considered marital property and how that marital property should be divided. 

A prenup is probably one of the best and least expensive ways of protecting your business against a future divorce.

But if you don't get a prenup put in place, a postnuptial agreement may be an option. It is similar to a prenuptial agreement except that it is, as the name implies, entered into and signed after marriage. In order to be valid, a postnup should contain the same vital elements as a prenup.

Having said that, a number of states still don't recognized postnups and even when they do, postnups are challenged and invalidated much more frequently than prenups.

Here's why: Before marriage, the parties are entering into an agreement much like two business people entering into a contract and neither party has any legal family law rights on the other. Theoretically, if they don't like the contract, either party can walk away. However after marriage, the situation is very different. The married couple now have very well defined legal rights regarding support and property division and they are considered to be in a fiduciary relationship with each other, meaning each party has to act in the best interests of the other party. Therefore, any transactions between them will be viewed with caution by the courts. By negotiating a postnuptial agreement, one party will typically be giving up some of these rights and that's why postnups will usually be held to a higher standard of fairness than prenups (on the theory that individuals have less bargaining power once married).

Nevertheless, if you don't have a prenup, try to get a postnup. It's better than nothing. Just understand that a postnup is not nearly as ironclad as a prenup and you never know how the courts will act if one spouse decides not to abide by the terms of the postnup.

Dig Deeper: Divorce-Proofing Your Company

How to Protect Your Business in a Divorce: Using a Partnership, Shareholder, LLC and/or Buy-Sell Agreements to 'Lock-out' Your Spouse.

Partnership, shareholder and/or operating agreements should include various provisions that would protect the interests of the other owners if one of the owners gets divorced, including:

• A requirement that unmarried shareholders provide the company with a prenup agreement prior to marriage along with a waiver by the owner's spouse-to-be of his or her future interest in the business.
• A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business.

How to Protect Your Business in a Divorce: Pay Yourself a Competitive Salary

This point is often overlooked. If you don't pay yourself a competitive salary and instead reinvest everything back into the business, your soon to be ex-spouse might claim that he or she is entitled to more money or a larger percentage of your business because he or she did not derive any benefit and all your money went back into the business instead of the household.

How to Protect Your Business in a Divorce: Think Twice About Involving Your Spouse in Your Business

As we discussed earlier, all or part of your business will probably be considered marital property. If your spouse was employed by you or your company, helped run the company in any way or even contributed business ideas during your marriage, then he or she may be entitled to a substantial percentage of your business. The more involved in your business your spouse was, the bigger that percentage would be. If you have partners in your business, then your spouse would own a percentage of your share.

How to Protect Your Business in a Divorce: How to 'Pay-off' Your Spouse

If for whatever reason you were not able to adequately protect your business and now your spouse is entitled to an ownership interest, here are some ways to pay him or her off (I'm assuming your don't want to be business partners after the divorce):

• Use your share of other marital assets including cash, stocks, real estate, retirement funds, etc.
• Property Settlement Note – this is a long-term payout (with interest) of the amount you owe your ex-spouse for the value of her share of the business.
• Sell the business and divide the sales price. This is obviously the least preferred method, but all too common. When the business represents the vast majority of all assets, there just may be no other way to pay-off the other spouse.
  

Disclaimer: This article is for information purposes only. The author is not an attorney and nothing contained in this article should be considered legal advice. Readers are advised to consult with their legal advisors before attempting to utilize any of the information in this article.

Jeffrey A. Landers is president and founder of Bedrock Divorce Advisors and Bedrock Wealth Management. He is a Certified Divorce Financial Analyst™, Chartered Retirement Planning Counselor™ and Financial Advisor. He can be reached at 917-602-6977 or landers@bedrockdivorce.com. 

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