5 Ways to Protect Your Business with a Divorce Agreement
by Arina Smith Business Planning 22 May 2018
The ideal situation for every marriage is a “happily ever after” story. But 52% of all first time marriages end in divorce. A whopping 70% of second and third marriages go that direction as well.
Divorce is hard for everyone involved, but they become especially complicated when someone owns a business. A business is the most valuable asset you own, one that you’ve poured hours and resources into. But most business owners don’t know that they could be doing things that could risk their business in the event of a divorce.
If you’re not sure how to protect your business, read on. We’ll talk about the different ways you can avoid risking your business with a divorce agreement.
Prenuptial Agreements :
A prenuptial agreement is the most common way that you can protect your business. A prenuptial agreement is a contract signed by both partners before their wedding. This contract outlines what will happen to all assets, property, and income in the event of divorce.
This is the fastest, easiest, and least expensive divorce agreement used to protect your business. This is especially important when both partners have a hand in the business. It amplifies the complexity of divorce.
Americans are waiting longer and longer to get married than their previous generations did.
They have more assets and property because of this. Many of them want to protect those assets before they agree to get married.
Some people opt for a prenup to prevent courts from making choices that they can make themselves when a marriage ends.
Prenups have to be written free of coercion and include absolute disclosure of all assets. If anyone violates these terms, the prenup is invalid. This means that one spouse cannot feel forced into signing the prenup and that no one can hide assets.
It’s recommended that everyone has an attorney at the sighing of these documents because it can get complicated easily.
If you have an honest discussion and planning before marriage, you will save yourself and your business a lot of hardship and frustration should the marriage end in divorce.
Postnuptial Agreements :
If you don’t have a prenup, a postnuptial agreement could be an avenue for you to explore.
They contain all of the information about assets and property as prenuptial agreements do, but they’re signed after a marriage.
They aren’t as strong as prenups because they come after marriage. They’re also not recognized in every state, and they’re more thoroughly scrutinized by judges.
Postnuptial agreements are often used to update a prenup that already exists. Your financial situation will evolve and change as you grow older. Your family will change, your business with grow, you might come upon an inheritance or wealth. All of these factors will complicate a divorce.
A postnup is a divorce agreement that will mutually determine how income, debts, assets, and any property will be divided in the future.
It can also outline that, if there’s a divorce, a spouse is entitled to a certain amount of money or a certain portion of assets before a certain date. This could help you protect the income that you might acquire in the future.
Separate vs. Marital Property :
When you are protecting your small business and other assets, it’s important that you understand the difference between separate and marital property.
State to state, this tends to vary. But, generally, separate property includes thins owned before the marriage, an inheritance received by one spouse only, and gifts received by one spouse only from a third party.
Small businesses owned before the wedding can become marital property if not protected and managed strictly. Once it’s mixed, like with a joint bank account or something in each spouse’s name, it will almost always be considered marital property.
All other property, income, and assets that are acquired during the marriage by either person will be considered marital property as well. This includes bank accounts and retirement plans, stock options, bonuses, commissions, funds, bonds, businesses, professional practices and licenses, real estate, vehicles, and even tax refunds.
If your separately owned property rises in value while the marriage is in effect, the increase can even be considered marital property.
‘Lock Out’ Your Spouse :
Partnership, shareholder, or operating agreements should have provisions that protect the interest of other owners should one get divorced.
This includes an agreement that anyone who is not married needs to give the company a prenup agreement prior to any marriage. This comes along with a waiver of the other owner’s spouse-to-be of his or her future interest in the business.
It will also prohibit the transfer of shares without approval from other partners. This includes the right of the partners or shareholders to buy the shares or interest of one or both divorcing parties so that they can maintain control of the business in the event of divorce.
Other Options :
You need to pay yourself a competitive salary. If you don’t, and you instead invest everything back into your business, your ex-spouse could claim that they’re entitled to more money because they didn’t get any benefit. Make sure some of your money goes into the household before the divorce.
Think twice about involving your partner in the business. If you employ your spouse or they help run the company, or they even so much as contributed ideas to the business before you got married, they’ll be entitled to a large percentage of it post-divorce.
The more involved your partner was, the bigger that percentage is. If you have partners, your spouse will own a percentage of your share.
If you can’t protect your business and your spouse will have an ownership interest, you can pay them off if you don’t want to be partners in business after a divorce.
Use your share of other assets or a long-term payout of the amount you owe for the value of their share of the business.
You could also sell the business and divide the price. This isn’t the ideal option, however, it’s a common one. If you fail to protect your business, there is just often no other way to afford to pay off your spouse.
Protect Yourself With a Divorce Agreement
It’s always a good idea to use a pre- or post-nuptial divorce agreement when you’re dealing with a business. No one expects a divorce, but that doesn’t mean you shouldn’t know what will happen in case one comes. Always hope for the best but prepare for the worst.
For more information on how to protect and improve your small business, visit us today!
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