Ed. Note: This is a guest post by Fred J. Cohen, Esq.
Most couples get married thinking that it will last forever and a day, but the reality is that more than half of first marriages end in divorce, while second and third marriages fare even worse. Let’s face it: divorce is never easy, and these proceedings often become contentious, particularly when it comes to dividing the marital property. These questions can become even more complicated when one or both spouses own a business. It takes dedication and perseverance to build a successful business and a divorce can undermine years of hard work and sacrifice, especially in cases where a spouse may be entitled to a significant percentage of the business. There are steps you can take, however, to protect your business assets.
Use a Prenuptial or Postnuptial Agreement
The best way to separate your business from your marital assets is to have a prenuptial or postnuptial agreement in place. While these agreements may take some of the romance out of the relationship, they can help to clarify the spouses property ownership and the property rights of each in the event of a divorce.
With respect to the business, marital agreements can help you establish how the business will be valued and distributed. In particular, you can clarify how much of the assets will be separate property, or if any of the business will be marital property. It is important to note that in community property states, a business that is started during the marriage may be split 50/50 if there is no marital agreement in place.
Select the Right Business Entity
One of the key considerations for any business owner is selecting the right business entity, and this is even more essential to protect these assets from a divorce. Forming a corporation or LLC enables you to create a separate legal entity that can hold the business assets. If marital assets are used for any business purposes, however, these assets can be taken back in a divorce. In some cases, the court may determine that the business is actually marital property.
Another option is to establish a living trust that can own the spouse’s business and its assets for the benefit of that spouse. While a well designed trust can protect the business from being divided, the value of the assets can still be used to determine spousal support.
What about partnerships?
If you are a partner in a business, it is crucial to have a written partnership agreement that specifies how your interest will be valued in the event of a purchase by the other partner(s). Such an agreement can also help establish the value of the spouse’s business interest, if any. In addition, a partnership agreement can also include provisions that that protect the interests of the other partners if one of the owners gets divorced.
For example, there could be a requirement for the unmarried partner to provide the business with a prenuptial agreement prior to the marriage. There can also be a provision that prohibits the transfer of ownership interests without the other partners’ approval. Similarly, the partners can claim the right to purchase the interest of one or both divorcing parties in order for the remaining owners to maintain control of the business.
The Bottom Line
In the end, in the event of divorce, it is crucial to take proactive measures that will keep the business operating. While the steps mentioned above can help to protect your business in the event of a divorce, some of it may still be considered marital property. It is also important to note that if your spouse worked for the business, or helped run it during the marriage, he or she may still be entitled to a substantial share of your business.
In any case, if your spouse is entitled to a percentage, you can pay him or her off by using other marital assets such as stocks, cash, real estate, retirement accounts and the like. The worse-case scenario is to sell the business outright and divide the proceeds. Regardless of when you start the business, whether before or during the marriage, you are well advised to engage the services of an experienced business and family law attorney who can advise you on to best protect your business assets.
About the Author
Fred J. Cohen, Esq. is the Founder and CEO of Zola Media. Named twice by Inc5000 as one of the fastest-growing private U.S. companies, Zola Media provides over 1000 law firms nationwide with a full spectrum of exclusive tools and services designed to help them get recognized and manage their practices so they can focus on the practice of law. For more information on Fred’s current venture, visit his website: https://zolasuite.com/