No one ever goes into marriage expecting a divorce to happen but the sad fact is 52 percent of first marriages fail and end in divorce and upwards of 70% of second and third marriages end in divorce. Splitting assets, figuring out alimony is difficult but even more so when one spouse or the other owns a business.
For most business owners their business is their most important asset. You spend years making your business grow, developing business connections, leads and joint ventures. Yet thousands unknowingly create circumstances that can put their business at risk should they get a divorce. Depending on what state you reside in and individual circumstances your spouse could receive half of your business in a divorce. If you do not want your soon to be ex-spouse in control of 50 percent of your business as a business partner then you need to take steps to protect your business interests, if you did not protect your personal interests with a pre-nup, then there are still items you can address after you have been married.
Of course the methods I will describe to protect your business must be enacted well before anyone even mentions the dreaded D word or divorce. Some techniques take years to be fully effective such as transfers to an irrevocable trust. If you are just entering into marriage or are engaged now is the time to take steps to protect your growing or established business. If you are not yet married do a prenuptial agreement. If you are already married then the advice below will pertain to you.
Businesses are considered Marital property in the eyes of the law including but not limited to closely-held businesses; professional practices and licenses; and limited partnerships. Even if you had the business before your marriage most courts will count the business as marital property.
You potentially have one powerful tool at your disposal if you did not go for a prenuptial agreement. That tool is a postnuptial agreement. This is very similar to a prenuptial agreement but this one is made and entered into after the marriage. Many states however do not recognize postnuptial agreements. Postnups are more closely looked art by the courts since one party in the marriage is giving up property rights and because each party involved in the marriage must act in the best interests of their spouse. Since with a postnuptial one party is giving up rights courts will often challenge them.
You can form a Partnership, Shareholder, or LLC to ‘Lock-out’ Your Spouse from any interests in your business. You simply add a prohibition against the transfer of shares without the approval of the other partners or shareholders, as well as adding the right of partners or shareholders to buyout the shares or interest of the spouse in question should a divorce happen, which will allow you and your partners to buy out the soon to be ex spouse and maintain control of the business.
You can also pay yourself a competitive salary. If you do not your spouse can argue that they did not benefit during the marriage from the business, and then they can ask for a greater share of the business. This is especially true for those who keep reinvesting the proceeds back into the business.
If these other methods do not work for you or you could not enter into them fast enough you still have one more recourse, pay off your spouse. This can be done in several ways. You can use parts of your other martial assets during the divorce settlement to pay off your spouse with such as cash, stocks, real estate and the like. You could opt for a property settlement note which pay your spouse over the long term including interest until you have paid your spouse the value of their share of the business. The last option is to sell off the business and then split the cash from the proceeds with your ex spouse, which of course means no more business yet is sadly all to common.