Divorcing can be stressful and an emotionally charged time. Extra challenges are added when it comes to business owners and divorce. Seeing the the business, which you are passionate about and completely invested in, assessed as a divorce asset can make for a more contentious divorce.
The prospect of your ex spouse becoming your business partner is one of the last things you’d want in a divorce. Your business is likely to be one of the most valuable financial assets you own, and it is the culmination of countless hours and resources dedicated to helping your business grow. Divorce is a complex matter, and there could be things that could jeopardize your ownership when it comes to business owners and divorce
What you need to know about business owners and divorce
The first thing you need to know about business owners and divorce is that these measures are preventive in nature, not reactionary, and have to be taken long before the thought of divorce even pops up in your mind. This is because of the principle that marriage is more than just a union of two people, it is also a union of their assets.
Separate vs Marital Property
In general, marital property refers to any assets that were acquired during the marriage, while separate property refers to property that each spouse owns prior to the marriage. However, do note that separate property can lose its status if it gets mixed with marital property. Something such as adding your spouse as a co-owner of your condominium unit could shift its status from separate property to marital property.
Prenuptial and Postnuptial Agreements
A prenuptial agreement is a contract signed before a couple’s wedding that details each party’s property rights upon divorce. Even when some states have Community Property and Equitable Distribution laws, a prenuptial agreement can effectively override these laws insofar as the prenuptial agreement is well-drafted.
Partnership, Shareholder, Buy or Sell Agreement Lockouts
These business types and operating agreements include several provisions that protect the interests of other owners if one of the owners gets divorced. A few examples of these provisions are the prohibition of the transfer of shares without the approval of other partners or shareholders, a provision that requires unmarried shareholders to provide the company with a prenuptial agreement, and a waiver from the owner’s spouse-to-be that denies any future interest in the business.
Pay Off Your Spouse
If you’re unable to place the necessary measures to protect your business, your spouse may now be entitled to an ownership interest in your business. Assuming you don’t want to be post-divorce business partners, you can opt to instead consider paying off your spouse from any ownership interests. Some of these methods involve using your share of other marital assets (to pay off your spouse) and a Property Settlement Note, which is an agreement that entails a deferred payment for the amount you owe (plus interest) to your spouse for the value of their share of the business.
The last resort to ensure that your ex-spouse does not get your business is to sell it and divide the sales price according to your shares of the business. While this is indeed the last thing you’d want to do, this is your only option for business owners and divorce if your business represents the majority of your assets.
A divorce is a difficult process to go through, not just because of the emotions involved, but also because of the assets involved, and this is compounded when it is business owners and divorce.
Nobody wants to lose something they worked so hard to build in a process as sour as divorce. Remember that if you plan on going through a divorce, it’s always best to consult a family lawyer like the ones at Manassa Law PC to help you find the best possible course of action to take.
It is strongly recommended that you make a financial settlement earlier, rather than delay, in the separation. All assets and liabilities (including the businesses you own) are taken into consideration, including the assets accrued and debt incurred during the separation. The Family Law Act of 1975 insists on full and frank disclosure of all financials regardless of your individual situation. You will have to share your tax returns and all financial statements that pertain to you, your interests and your business, which may be for as long as you were in the relationship (although, you only have to hold these documents for 6 or 7 years for the Tax Office now).
What is your business worth?
It may be worth obtaining a business valuation (by an independent valuer) earlier in the separation, especially if it is profitable and growing. However, if the business’ financial circumstances change throughout the separation, then this is also considered in the financial settlement.
