How to Protect Your Small Business in the Event of a DivorceFamily and divorce lawyers share 8 ways to insulate your business before and during marriage and in the midst of a divorce.
Protecting your small business in the event of a divorce may not be the happiest idea to contemplate, but it is something every small business owner who is married or planning to marry must consider.
Even though divorce rates have been steadily falling since the 1980s, a split is still a real possibility for any marriage. If a divorce does happen, it can sink your business if you’re not prepared.
Separate or joint property?
If a couple is facing divorce, the court will determine which assets are premarital or separate property and which are marital or joint property. According to the American Bar Association, examples of separate property may include inheritance, gifts to just one spouse, property that a spouse brought into the marriage and kept in his or her own name and assets that were never commingled by being placed in a joint account.
Joint property is property and income acquired during the marriage. Examples of joint property may include wages earned during the marriage, a home or furniture purchased during the marriage and assets acquired during the marriage.
Determining if your small business is separate or joint marital property can be a time consuming and costly process — but you can avoid it by taking some smart steps early on.
Randall Kessler, family lawyer, professor, author of “Divorce: Protect Yourself, Your Kids and Your Future” and former chair of the Family Law Sections of the American Bar Association, said the best time to protect your small business is before you say “I do.”
“Ultimately as with most things, the ounce of prevention is better than the pound of cure. Ask the right people the right questions. Get advice from professionals who have advised others and who have experienced divorces involving small businesses. Any good business owner plans for the future. And like it or not, divorce is a real possibility in just about any marriage. To not plan for it is not good business,” Kessler said.
Steps to take from the get-go
No one expects to get divorced, but taking these steps will protect you if it does happen.
Sign a prenup. Other than staying married, your best protection is a solid prenuptial agreement. Kessler said small business owners should have the lawyer that handles their business matters work closely with a divorce lawyer to weave a tight prenup if possible.
Certified family law specialist Richard Renkin agreed. “Arranging a premarital agreement is the best way to avoid contentious divorces. These agreements often state what each party owns and how assets will be divided during marriage,” Renkin said.
Assemble an advisory team. Build a team of professionals to help you structure your business and protect it in the event of divorce, Kessler advised. “For small business owners, the corporate counsel or business lawyer who helped set up the business or who the owner chooses to use for business related disputes should also be a part of the advisory team,” Kessler said.
In addition to your regular attorney, you should meet with a financial planner and a divorce lawyer, Kessler suggested. Renkin agreed. “Speak with an experienced family lawyer. The laws around business division get very complicated.”
Structure your business in a smart way. A sound legal structure protects your business from many potential threats. Consult your business attorney to determine the best way to incorporate your small business. Options that may protect your assets include C Corporation, S Corporation and Limited Liability Partnership (LLC). According to Renkin, forming an LLC or a corporation to make the business holdings separate from personal holdings is one of the easiest ways to protect yourself.
Consider a postnuptial agreement. Postnuptial agreements are a growing trend and have been used when no prenup exists or to amend an existing prenup. “The concept is basically the same as a prenuptial agreement except it is entered into after the marriage has occurred,” said Kessler. Most states currently permit postnuptial agreements, he noted.
Keep business and personal funds separate. Avoid commingling your business and personal accounts. In addition to being good business practice in general, keeping business and personal finances separate will save time and accounting fees in the event of a divorce.
Maintain clear business boundaries. According to divorce lawyer Christian Denmon, if your spouse is not involved in the daily workings of your small business, do not give him or her partnership or an equity interest in the business. “This is a no-brainer, if you want to keep your
business in divorce court, then don’t give your spouse an equity interest,” Denmon said.
Another mistake is putting your spouse on the company payroll just to save on taxes. “Too many small businesses put the spouse on salary, even though he or she may not even work in the business. This creates a mess and may hurt you later,” Denmon said.
No matter what, do not give your spouse the business credit card for personal expenses. “Again, this just creates a mess that is difficult to resolve later,” Denmon said.
If divorce is looming
If divorce looks imminent and you have not taken measures to protect your small business, consider these options.
Offer to buy out your spouse. According to Denmon, a judge may decide that your business is still yours even though it has value that accrued during the marriage. “Are you the sole equity shareholder of your small business in your incorporation documents? If so, then you will likely keep your business. You will just need to ‘buy out’ your spouse for his or her share of the equity that accumulated during the marriage,” Denmon said.
Renkin said buying out your spouse is the easiest way to resolve differences about value and ownership of a small business. “You can also offer a percentage of the revenue stream until a buyout is possible,” Renkin said.
Prove you are the proprietor. Renkin said good record-keeping is a must. “You need to prove that the business would not have existed without your time, talent and money. While your former spouse may be entitled to financial compensation, it will be in your best interest to retain control over a successful business,” he said.
“The most common reason, in my experience,” Kessler said, “for a business owner to retain a business is a common sense one. That is, the other spouse is not involved in and has no ability to help in the business. In such cases it simply makes sense for the court to award the business to the only spouse who can run it. Therefore, perhaps the business owner should be sure to run it without help from his or her spouse.”