Divorce-Proof Your Business

If you are an entrepreneur, and have built a successful business from the ground up, you obviously want to do everything in your power to protect it. You probably have insurance against fire, crime, and other “predictable” calamities that can bring down any business. However, many business owners don’t consider one of the most common risks to the security and continued viability of a business: divorce.

It’s estimated that 40 to 50 percent of first marriages in the United States end in divorce. The vast majority of couples don’t get married expecting to get divorced at some point. So, it’s irrational to think that divorce is something that couldn’t happen to your marriage at some point in the future, and it’s even more irrational to refuse to prepare for the possibility.

In a significant number of marriages, a business started by one of the spouses prior to the marriage is by far the most valuable asset owned by either spouse. So, during a divorce, it should come as no surprise that ownership of a business is often one of the most contentious points.

This article in Entrepreneur Magazine provides a few basic steps that business owners can take, early in their marriage, to ensure that their business gets through a divorce unscathed. Many people are, for obvious reasons, pretty uncomfortable planning for a potential divorce before they’re even married. However, just because it’s unromantic, doesn’t mean it’s not the smart thing to do. Obviously, you’re going to do everything in your power to make sure your marriage works. And, if you’re marrying the right person, for the right reasons, it probably will. But that doesn’t mean you shouldn’t prepare for the possibility that it won’t.

First, and most obviously, you should create a prenuptial agreement, or “prenup.” A prenup is an agreement that’s entered between two spouses, before they get married. In a prenup, the spouses can agree on the status of various pieces of property, in the event of divorce. For example, you could write a prenup that makes clear that your business is solely your property, and that your spouse will not be entitled to any share of it upon divorce.

Obviously, in order for a prenup to be legally binding, your spouse has to agree to it. However, if you trust one another, and the agreement is fair to your spouse (it has other mechanisms to provide for him or her in the event of a divorce, without giving them an ownership stake in the business), chances are you can come to an agreement.

It’s important to note that, in order for a prenup to be valid, each spouse must be represented by their own attorney in the negotiation of the agreement, and they usually must be given some time (usually a few days) between being presented with the final version of the agreement, and signing it. This is meant to ensure that they have plenty of time to think about it.

Obviously, you need to consider the laws of your state. There are two basic systems of marital property in the United States: community property and separate property.

In community property jurisdictions (which are a sizeable portion of U.S. states, but still a minority), all property that’s acquired by either spouse during their marriage (with a few exceptions) is the property of both spouses, with each spouse having an undivided 50% interest in the property.

This means that if you start a business after you’ve gotten married, your spouse automatically owns half of it. However, in every state, any piece of property can be turned into separate property by agreement of both spouses. If you live in a community property state, and want to retain your business, it’s essential that you and your spouse come to an agreement over the status of this piece of property, and commit it to writing.

Another thing you can do is minimize your spouse’s involvement in the business. If your spouse played an integral role in the development or operation of the business, a divorce court may well find that they are entitled to a share of the business as compensation for their efforts.

Finally, if you are getting divorced, and marital assets are in dispute, you should be prepared to give up some assets in exchange for keeping the business. These might include bank accounts, the family home, collectibles, etc. Obviously, it’s up to you to decide if keeping your business is worth giving up all these assets. However, in the event of a divorce, no matter how proactive you were, a court might still find that your spouse is legally entitled to a share of the business. If you really want to keep full control of your business, you may have no choice but to “buy out” your spouse’s share of the business.

Of course, this depends on whether or not your spouse is willing to give up his or her legal share of the business for a price that you can accept.

Obviously, there are many other legal and financial measures you can take in order to maximize the chances that your business will survive a divorce intact. All of these measures depend, however, on advance planning and communication between you and  your spouse.