Top 5 Divorce Tips for Business Owners
UPDATED: April 30, 2020
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Divorce is always stressful for all involved, but when the spouses also own a business together, it can create an additional headache and raise many questions:
- Can my wife get half my business in a divorce?
- Is a corporation protected from divorce?
- How is a business divided in a divorce?
- How do I protect my LLC from divorce?
For these reasons, it’s always a good idea when starting a business with a marital partner to consider things that can be done prior to the starting of the business. This may reduce any potential disagreement later down the road.
We’ve got some steps that can be taken prior to the start of the business, or even prior to the start of a marriage, that will help avoid a long legal battle with expensive divorce lawyers. If a couple does not plan ahead, they can at least take steps before the business is divided or sold.
In this case, the decision to dissolve the marriage will lead to a fair outcome when it comes time to divide the business. So if you’re in this difficult scenario, we want to help the best we can with these five steps.
If you find yourself in need of a business or divorce attorney, use our FREE tool above to find options in your area.
#1 – Keep the Family Finances Separate from the Business
At the start of a new business, a couple should be careful not to co-mingle personal assets with the assets of the business. A new business should have a separate bank account with the income and expenses from operating the business that is distinct from any personal finances.
The benefits of keeping finances separate in the event of a divorce are that the business does not take on personal debt. This can lead to serious emotional decisions while operating the business. Also, the valuation of the business will truly reflect the income and earning of the business as a stand-alone enterprise.
Many couples that co-mingle personal finance with a business will find out that taking out a mortgage on the primary residence and racking up lots of credit card debts to fund a business is a recipe for disaster.
#2 – Get a Prenuptial or Postnuptial Agreement Spelling out the Terms of a Separation
A couple that already has a business and plans to get married, or is already married and plans to start a business, should consider a prenuptial or postnuptial agreement. The terms of such an agreement allow for a couple to decide the future of the business in the event of a divorce.
While it is certainly understandable that the topic of discussing a potential divorce is an unhappy and delicate subject, it still deserves legal attention. Having a legal document in place that outlines the fate of the business after a divorce will provide clarity to both parties on issues of ownership of the business if the marriage does not work out.
A divorcing couple does not want to get tangled in a legal battle and be forced to sell a successful business merely because the parties cannot agree over who should take control and ownership of the business when the marriage fails.
#3 – Get a Shareholder’s, Partnership, or Employment Agreement in Place
Having a business agreement in place is especially important when the agreement is between spouses. A business agreement is essential for spouses to avoid disputes about the control and operation of the business on a day to day business if there is a divorce.
A spouse that is also an employee may be an essential person to operate the business and a divorce could jeopardize that success. Conversely, a divorcing couple may need to terminate a spouse during a contentious divorce if the person jeopardizes the future success of the business.
Regardless of the factual circumstances unique to each divorce, an existing business agreement will provide clarity for all parties. Drafting an agreement memorializing the understanding of the parties from the onset minimizes the opportunity for disagreement in a divorce.
#4 – Consider Buying out the Business from Your Spouse
A divorcing spouse with no desire to operate the business with an ex-spouse should consider buying back the interest of the other spouse. The idea of paying 50% of the value of the business may be worthwhile for both parties as the emotions of the personal relationship may spill over into the business relationship.
The person that buys out the ex-spouse will own 100% of the business while the other party takes their share of their past success and moves on. It’s common for a divorcing couple to not want to continue to work together with their ex-spouse in a business when the personal relationship has dissolved. Buying out the other spouse is the quickest way to allow the parties to divide the business and move on with their lives.
If there is no way to avoid splitting up the business, then make sure to get a fair business evaluation. The trickiest thing about buying out an ex-spouse is determining the fair market value of the business. A couple should consider consulting an accountant to review the books and records to determine the true financial picture of the company.
An expert may be necessary to offer an expert opinion on the value of the business. Regardless of the method used to value the business, it is incumbent on both parties to seek to be fair with their ex-spouse. A truly fair value for the business should be established so that either party can put themselves in the position of the other party and be satisfied.
#5 – The Marriage may be Broken, but the Business Shouldn't be
All couples in business together ought to be mature and recognize the unique legal issues involved with owning a business with a spouse. In the event of a divorce, there should be pre-existing clarity and decision making in advance on how the business should operate in the event of divorce.
Divorce is a challenging time. Reduce anxiety and confusion by having a legal plan in place. In the end, the marriage may not work, but the business should still thrive.
To help reduce the stress even more, enter your ZIP code below to find business and divorce attorneys near you.
David Reischer, Esq. is a licensed family lawyer with over 15 years of legal experience and the Founder and CEO of LegalAdvice.com