If you are a business owner facing divorce, the thought of protecting your business from divorce can only add to the stress and strain that you are already going through. Unlike most property or personal assets, your business represents a personal investment of your own time, money, creativity and hard work. The idea that you might lose something you built because of an unfortunate turn in your personal circumstances can be both frustrating and frightening.
There are a few things you should keep in mind, both when going through divorce, as well as before divorce even seems a prospect to you. If you never get divorced, that’s great, congratulations. But by taking time to make sure your business is protected you can prevent many headaches, including every entrepreneur’s ultimate nightmare: losing your business.
Here are some things you should consider that may help keep your business intact and functioning:
Get a prenuptial agreement. Sure, it’s not very romantic to contemplate divorce before you even marry, but if you own a business it’s your responsibility to think about the possibility. Speak openly and honestly with your intended about your desire to keep your business separate from the marriage, and craft an agreement that is fair and prudent for both parties before you have any reason to be contentious.
Insert provisions into your business agreements to keep your spouse out of the business. This sounds cold-hearted perhaps, but if you are in a partnership or corporation you owe it to yourself, your partners, your employees and your shareholders to protect the business. You should already have a buy-sell agreement with any partners. This will typically state what should happen to the business should any owner’s status change, will outline any pre-set price agreements for sale of the business, and may contain language that limits your spouse’s involvement in the business. The buy-sell agreement, while it doesn’t protect you entirely from the events that may occur in a divorce, does provide a contractual framework and legal foundation for any future court rulings about the business.
Keep your family assets separate from your business assets. This is just common business sense, but it’s even more important in the event of a divorce. If you are using family money to fund your business, you are creating a situation where your spouse may have claim to some of your company’s equity.
Pay yourself. Similarly, if you are not taking a salary, or taking a salary that is less than the going rate for your line of work, your spouse can claim that you have taken assets that rightfully belonged to your family and put them into your business. In the eyes of the court, this may substantiate your spouse’s claim to a stake in your business.
Don’t involve your spouse in your business. Again, this sounds cold, but there are sound business reasons for keeping your spouse’s involvement in your business to a minimum. If you hire your spouse, it is prudent to terminate that relationship as soon as possible if you end up in a divorce. The greater the involvement of your spouse in your business, the greater the claim your spouse can make to a stake in that business.
Create a Property Settlement Note. This will outline in advance how your spouse is to be paid out for their share in your business, should your marriage be dissolved.
Put your business and its assets in a trust. This will protect the assets from divorce, as you will no longer technically own them. The trust becomes, in effect, the owner of the business, and not only its current assets but also its future growth will remain outside the parameters of your marital assets.
Trade your share of the marital assets for equity in your business. This is only relevant if you are already going through a divorce, but it can help keep your business intact. You can maintain your share in the business by trading off other assets that are less important to you.
Sell equity in your business to raise capital to keep it running. Not an ideal solution, but if you can convince investors to buy shares of your company, you may be able to pay off your spouse while maintaining your business functions.
Split the business. This is the least desirable course of action, as it either means that you will have to continue your relationship with your ex in a business context-which is rarely comfortable-or, worse, that you’ll have to sell your business and divide the assets.