Entrepreneur’s Guide to Protecting Your Business During Divorce
You know how to start and run a business. You know you need insurance to protect that business against all sorts of risks – fire, flood, personal injury, professional liability, etc. But did you know that one of the greatest threats to your business is divorce? Here, we will provide you a guide to protecting your business during divorce.
Your business will generally be considered by the divorce court to be a “marital asset”, in whole or in part. All marital assets are divided by the divorce court between the spouses, usually 50/50.
Of course no one plans to get divorced. But the reality is that a very high percentage of marriages do end in divorce. If you do not want half of your business handed to your spouse in the event of a divorce, there are precautions you can take. Just like the insurance you purchase to protect your business against all kinds of risks, you may never need these precautions. But if you do find yourself in the middle of a divorce, these precautions may save you and your business from financial ruin.
Your guide to protecting your business during divorce:
Make sure your business is not a “marital asset”
Assets accumulated during a marriage are considered “marital assets”. If you started your business during your marriage, that business will generally be considered a “marital asset”. Even if you started the business before the marriage, some of that business will generally be considered “marital”.
What does it mean if some or all of your business is a marital asset?
It means that you and your spouse will have to determine the value of that business. This generally requires a business valuation expert – one for each of you. Your expert will try to minimize the value, your spouse’s expert will try to maximize it. If the business is only partly marital, the experts will have to calculate the portion that is marital. These are complex calculations that typically cost in the five or six figure range. If there are other business partners, the process becomes even more complicated.
How can you avoid having your business be considered a marital asset?
(1) By Agreement
Discuss this issue with your fiancée before your marriage (or your spouse after your marriage) and agree, in writing, that the business will not be considered a marital asset. The form and process of creating and executing this agreement is critical to its effectiveness and enforceability. You will need a lawyer to draft it and your fiancée/spouse will need a lawyer to review it. These agreements are generally created in the form of Prenuptial or Postnuptial Agreements. But there may be other options. And there may be a need for additional agreements such as a Buy-Sell Agreement and/or Shareholder Agreement.
(2) By Placing Your Business in Trust
Placing your business in a trust, e.g. a Domestic Asset Protection Trust, can remove the business from your marital estate. There are many considerations you need to weigh in determining whether this is the best course of action for you. You will need a lawyer to assist you with this decision.
You can take other steps to limit the exposure of your business in divorce
Even if you do not have an agreement or trust that defines your business as separate, non-marital property, there are steps you can take to limit your exposure:
(1) Keep all money separate
Commingling of non-marital assets with marital assets can transform the non-marital assets into marital assets. It is critical to set up separate bank accounts for your business and ALWAYS use these accounts for all business transactions. This goes for expenses too.
(2) Don’t employ your spouse
If your spouse is not an important contributor to your business, resist the temptation to put him or her on the payroll. This seemingly innocuous act can undo an Agreement to keep your business entirely non-marital.
(3) Don’t underpay yourself
Entrepreneurs often underpay themselves. This can result in a higher valuation for the business that is not realistic and may leave you in the position of having to pay more than you can afford to buy out your spouse.
(4) Plan buy-out options
If you think you may be headed for a divorce, and you do not have an agreement with your spouse regarding the business, plan how you might raise the money needed to buy out your spouse, e.g. a credit line, other investors, potential loan sources, etc.
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