If you’re an entrepreneur, you worked hard to establish your business and you’re probably very protective of it. Rightfully so—you invested your time and money into seeing your business succeed. Unless you built your business with your spouse, you and any business partners you may have probably want to keep your spouse out of the business in the event you and your spouse get divorced. By working with the experienced business lawyers at Fremstad Law, you can protect your business from divorce.
A simple and effective way to protect your business from the possibility of divorce is by signing a prenuptial agreement. A prenuptial agreement is a contract that can specify how property will be divided if a couple seeks a divorce. The agreement can identify the business as separate property, describe how assets will be divided in the event of a divorce, and spell out what the couple thinks will be a fair division of assets while that division is still a hypothetical one.
Without a prenuptial agreement, a business may be counted as a marital asset, subject to equitable property division in a divorce. To be valid, you and your spouse must both have the prenuptial agreement reviewed by separate attorneys.
Even if you have a valid prenuptial agreement, if your spouse participated in business operations, the business may still be considered a marital asset and subject to equitable property division. To avoid this result, keep your spouse out of the business operations, both financially and in terms of business decision-making.
For married business owners, the line between business assets and personal assets can be blurry. It is not unusual for family finances to be closely tied to those of the business. When this occurs, there is a greater likelihood that the business will be considered a marital asset. To avoid having your business considered a marital asset and subject to the Ruff-Fischer equitable property division guidelines, it is important to avoid commingling business assets and personal assets.
A buy-sell agreement is a contract between business partners that can be used to protect your share of the business in the event of a divorce. Whether it is a shareholder agreement, a partnership agreement, or a membership agreement, the contract can specify what will happen to the business assets in the event one of the partners is getting divorced. These contracts are sometimes referred to as a “business will” that allows business partners to buy-out a share of the business to prevent a divorcing spouse from gaining control over business ownership and operation. If the agreement is between you and your business partners, but not your spouse, your spouse is unlikely to end up with any actual ownership of the business; however, the value of the business may be considered as part of the marital estate for equitable distribution. Therefore, it is important to have a prenuptial or antenuptial agreement in place.
If your spouse is also your business partner, the shareholder agreement can include a buy-out provision that requires one spouse to buy-out the other or otherwise addresses what will happen in the event of a divorce.
A buy-sell agreement should contain a provision that addresses how the business will be valued, such as an agreed-upon formula for valuing the business, a set price, or a requirement that the business be valued by an appraiser or some other professional. The agreement should also address financing options for how the remaining business owners will buy-out the other share of the business.
You can use a Domestic Asset Protection Trust (DAPT) to protect business assets from your soon-to-be-ex-spouse. A DAPT transfers ownership of the company into a trust, thereby sheltering it from consideration as a marital asset.
If you are already moving towards a divorce and have not proactively taken steps to protect your business from a divorce, consider sacrificing other assets so you retain ownership of the business. For example, by giving up the marital home, you may increase your chances of retaining control of the business.
If you are an entrepreneur, protect your business by working with a professional. At Fremstad Law, our mission is to move our clients forward.
© 2022 Fremstad Law