So you didn’t sign a prenup and you are scared of losing your business? If YES, here are 27 iron-clad ways to protect a business in a divorce without a prenup.
Divorce is one thing no married couple thinks about on the wedding day or the honeymoon, but the fact remains that a lot of marriages end in divorce. In fact, research has it that more than 50 percent of first marriages end in divorce and the statistics are even higher for second marriages as about 70 percent of them don’t last till death do them part.
The process of releasing a couple from the bond of marriage is very complicated and complex, and it takes its toll both physically and emotionally on the couple. The process becomes even more traumatic if there is a business involved as there is a risk of losing the whole business, and if you have partners, you also risk their means of livelihood.
To any entrepreneur, his or her business, no matter how small, is a great asset, be it a window cleaning business, a laundry service or a multi-million dollar business, it doesn’t matter. Another thing here is that the court also views the business as an asset to be split between the couple during a divorce. It doesn’t matter if one of the spouses started the business before the marriage or if one of the spouses was not involved in the running of the said business.
Mixing marital and business assets creates further complications, making it more difficult to draw a line between the company and the marriage. Again, if the business expanded during the marriage, the value of the increase would be ascertained and divided between the couple. It doesn’t matter who operated the business or how it is titled, the judge’s duty is to ensure that the percentage of the marital assets owned to each couple is paid. If the marriages’ financial assets cannot meet that obligation, the business is sold and the money accrued used to make up the difference.
Because a privately owned business is often the most valuable asset of a couple, this scenario is quite the common thing that happens. The question now arises, how can a spouse protect his or her business in the event their marriage hits the rocks?
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The Importance of a Prenuptial Agreement in a Divorce Suit
One of the ugliest aspects of a divorce is the part where the couple has to share their assets equally. Usually, the law would prescribe that they share their homes, stocks, pension plans, and business assets including professional practices and licenses equally.
The argument is usually built around the fact that as marital partners, they must have offered some measure of support to each other at some point and this support must have contributed to the growth and increase in personal and business assets.
So when a couple decides to go their separate ways, the court decides that it is only fair that the assets are divided amongst the partners equally as compensation for each partner’s financial, moral and emotional support to the other while they were a couple.
One way to prevent this is to sign a pre-nuptial agreement also known as a prenup.
What is a Prenup?
For someone who already owns and operates a viable business prior to getting married, then maybe you should start thinking ahead into the future. If you by any means have to worry about protecting what you’ve built, consider a prenuptial agreement. A prenuptial agreement is a contract two people enter into before marriage that lays out how to divide property in the event of a divorce.
It serves as a way to safeguard the couples’ assets and belongings during a divorce. Such a document when legally obtained would ensure that the person who owns the company protects his or her company (property) from being shared equally between the couple.
However, getting your partner to sign a prenup is not always easy. Some partners may take offence with this and it can bring some aggravation in the relationship. However, it’s still important for you to protect your assets as the future can be highly unpredictable.
You don’t have to sign a prenup if you can protect your business assets adequately using some of these tips:
27 Ways to Protect your Business in a Divorce Without a Prenup
1. Keep Real Estate Separate: You should never put your partner’s name on any real estate or rental property that belongs to your business at any point otherwise they would be entitled to half of these properties during a divorce because a lawyer can easily argue that you had offered half of the real estate to your spouse as a gift hence your decision to put their name on the deed. The argument would still hold up even if you decide to remove their name from the deed eventually.
Most people add their spouses’ names to the deed for estate planning purposes but it’s best to have just your name on the deed and then create a separate will or trust that prescribes that the property should be handed to your spouse when you pass away.
The will or trust can always be revoked without a consequence if you decide to get a divorce hence it is safer than just slamming your partner’s names on your business assets.
2. Consider incorporating or getting an LLC
This option is mostly advisable for small businesses. Even if you are the sole owner of your small business, you can form a corporation or LLC to protect its assets, especially if you started the business before you got married. By changing or upgrading your company into an LLC or corporation, you create a separate legal entity that can hold ownership of company assets (e.g., a company car).
But keep in mind that marital assets that are used to pay for company expenses can either be extracted in a divorce or used to determine that a company is actually marital property.
3. Keep business and personal assets separate
Do not mix your business assets with your private assets unless absolutely necessary. Keeping the business entirely independent of your private wealth can help during a divorce. It will help, too, for example, if the family home has not been used to secure borrowing within the business.
So, when setting up a business, it is very wise to keep business and personal assets separate if you want to protect your business in the event of a divorce. Divorce courts can only divide marital property and things purchased with the proceeds of marital property; if you remained a passive owner throughout the marriage and invested no marital funds or effort in growing the business, your interest might pass through unscathed.
4. Keep your records
Keep clear and distinct financial records, covering monies paid in and withdrawn. Clearly record any loans made to the company and document the terms for the repayment of that loan. They would always come in very handy to save your business.
5. Draw up a founders’ agreement
This agreement sets out what happens in the event of a dissolution or dispute. A Founders’ Agreement is basically a documentation of how profits and equity would be split in a business when a partnership is dissolved. A founders’ agreement is generally not legally binding, but it does provide some protection to founders who later find themselves working with an attorney as they sort out their business separation. The agreement is a documentation that you were once on the same page as your cofounder.
6. Don’t give full reign to your spouse:
If you started your business before you met your spouse, one of the ways you can protect your business in the event of a divorce is to avoid giving your spouse a lot of free hand in the business. If your spouse is actively involved in your business, find a way to carefully ease him or her out as soon as possible.
If the role of a spouse is quite prominent and is verifiable, a lawyer can build a very strong case in that regard that the spouse helped to build the business and as such deserves an equal share of it. So invariably if you want to protect your business in the event of a future divorce, exclude your spouse from the business.
7. Get Your Business Valued around the Marriage Date: The court can only decide that you should share half of your marital business assets with your partner. If your business was worth $5 million before you got married, and your business is now worth $10 million around the date of divorce, then your partner can only share out of the $5 million growth and not the entire business value.
This is why it is important to get your business valued around the marriage date so that you can easily proof what your business was worth before the marriage and keep the court from mandating you to share that with your partner.
8. Pay Yourself Salary: It is also important to pay yourself a decent salary from your business and keep proofs of these. If you fail to take out salary from the business regularly, then your spouse’s lawyers can easily argue that you starved the family of cash flow in order to build your business hence your partner is entitled to some compensation for the inconveniences that they suffered.
9. Don’t Employ Your Spouse: If you employ your spouse or allow them to be actively involved in your business, then the court would require you to compensate them for their efforts and they would be entitled to a share in your business. It helps to avoid sending your spouse on those business errands or having them involved in your business in any capacity.
10. Keep Your Finances Separate: Don’t use personal funds to run your business and vice versa. Make sure you maintain a separate record for your business and family expenses, and prevent them from overlapping. When there is a clear distinction between the two, it would prevent divorce lawyers from lumping business and family finances together in a divorce.
11. Place Your Business in a Trust: One option, though a complex one, is to place your business in a trust.If you place your business in a trust, it is no longer regarded as a personal asset, so your partner cannot get to share in the business’s assets. In this case, the company is no longer technically a marital asset because you no longer legally own it.
What is a Trust?
A trust is a separate legal entity from the settlor, and trusts can own real estate and have bank accounts. A business owner could legally transfer the business assets to a trust in order to protect the business. Once you place a business in a trust, a divorcing spouse no longer has access to it.
Trusts also have their own federal identification number, further demonstrating their separation from the owner of the business. Note that there are tons of legal concerns to be aware of when taking this route, but in some circumstances, this may be your saving grace.
12. Sign a Post-Nuptial Agreement: A post-nuptial agreement signed at least 7 years before the divorce can help you protect your business during a divorce. As a business owner, if the idea of a prenup escaped you before marriage, or if the business in question was started after you have gotten married, you still have an option at hand. You can get a postnuptial agreement.
A postnuptial agreement can help protect the business in the event of a divorce. Similar to a prenup, couples often enter into a contract specifying who retains ownership of a commercial venture when a marriage ends. This step can specifically protect what you have built, even after your wedding day.
A postnuptial agreement would make a divorce that would have otherwise being messy and protracted to be a smooth sail for both parties, especially where the business is concerned as each party already knows what would accrue to them in a divorce.
13. Create a Buy-Sell Agreement: For people who forgo a prenup, before the wedding is also the best time to set up a buy-sell agreement to protect a family business from disintegrating in a divorce. Also known as a buyout agreement, a buy-sell is a contract between business co-owners that governs the situation if one co-owner dies or is otherwise forced, or chooses, to leave the business.
In a divorce, a good buy-sell agreement would require a former spouse to sell any interest received in a settlement back to the company’s owners at a price set by a specified valuation method.If your business is a partnership with other people, a Buy-Sell agreement can protect the business during a divorce.
What is a Buy-Sell Agreement?
A Buy-Sell agreement prescribes what happens to a business if the status of one of the owners should change. Usually, it limits your spouse’s ability to acquire ownership of your business, and allows you to buy back the shares awarded to your ex at a preset price which is usually very low.
14. Buy out Your Spouse’s Shares: You can reach an agreement with your ex to buy off the shares that they have been awarded by the court. You can ask for a flexible and easy payment plan that allows you to pay off your ex overtime so that they don’t have to take over ownership or get a portion of the business shares.
15. Forfeit Other Assets: You can reach an agreement with your ex where you forfeit some of your other marital assets so that you can keep your business assets solely to yourself.
16. Add a partner
A person is more vulnerable to lose his or her business if the business is operated solely by the person or maybe with an input from their partner. If the business already has significant debt, you could consider adding an outside partner or going after private equity investment or venture capital to ensure that the fate of the business does not rest solely in the family.
f you choose to add a partner, be sure to include a buy-sell agreement in the deal. If a business is 100% owned by one spouse who is getting divorced, then the courts will treat it just like any other asset – to be divided or shared, unless there are good reasons not to. If the business is jointly owned with other shareholders or partners then the court is less likely to take steps which would damage the livelihoods of the other shareholders or partners.
17. Sell a Stake to Other People: Lastly, you can sell a stake in the business to other investors so that you can raise some money to pay off your ex.
If you are selling a stake, make sure you sell to someone who is able to pay cash so that you can easily pay your ex off in cash, and keep them from owning a portion of your business.
18. Give priority to your business during the divorce settlement
In a divorce settlement, a couple’s total assets are added up and then divided. Try to retain 100 percent ownership of the business by forfeiting other assets instead. You could choose to let go of say your retirement accounts, the family’s home, vehicles or collectibles in favour of the business. If those assets are tangible enough, your spouse may decide to let you go.
19. Leverage on advisers
Trusted advisers outside the company can be a great resource during the highly charged months—or years—of a divorce. You could seek for people that would help you run the business and help you review all big decisions during the period. Their advice would help keep you on track and help you not to act irrationally. Try and include professionals like accountants and the like in your advice team.
20. Have separate counsels
You may even want to agree ahead of time that you and your ex-spouse will have separate legal counsel; this will not only protect your own interests in the business, but would also prevent any appearance of betrayal during the divorce.
21. Arrange to make any payments over time: It is common to pay an ex for a share of a business gradually. This is the safest thing to do if you have been provided the option. The monthly payments can come from the business’s cash flow or a bank loan.
22. Keep your relationship With Your Ex
More often than not, there is no clear cut way to extricate your ex-spouse from your small business, and the best way to ensure that your business survives the divorce is to maintain a healthy business relationship with your former spouse.
If the couple each has strong stakes in the business, they may decide to retain the business and run it together instead of selling it off and dividing the proceeds. Honesty and civility can often impact divorce in ways that legal arguments never could, so being open and amiable about your mutual business interests can go a long way.
23. Split the Business
Splitting the business is another good tip on how to retain your business in the event of a divorce. In some situations, it is possible to divide the company, essentially breaking it into two pieces. For example, if you and your spouse run a financial consulting service and each have a distinct set of clients; it may be possible to break apart the business in a divorce. With good business skills, you can still build up your share of the business to the standard it was in originally.
24. Sell the Business and Move O
This should be your last option if everything else fails. This process is usually resorted to if there is no agreement to reach. When this is the case, the best option may be to sell the business, split the proceeds, and move on. This comes with its own set of drawbacks.
One advantage is that if your business sells quickly, you will both soon have money to pursue your own interests, and you can still set up a new business. Also, selling the business means you can avoid financial ties to your former spouse. But keep in mind that many companies aren’t easy to sell, so you may be stuck working with your ex for quite a while before the sale is completed.
How much a company sells for, if it sells at all, depends on what business you’re in, your location, demand, competition, and much more. Only a fraction of small businesses sell on an open market. You may only be able to liquidate the merchandise, equipment, or corporate assets and wind up taking a substantial loss.
In conclusion, one other important thing a spouse can do to protect his or her business during a divorce is to hire an attorney. Professionals can help untangle the mess. You may even want to enlist a financial specialist or forensic accountant to run the numbers.
Again, it is advantageous to have insurance if you are running a small business. A whole-life insurance policy that builds cash value can be liquidated to provide the funds to buy out a spouse’s share of the business if need be. It may be worth your while to go into a restrictive clause to prevent the departing spouse from stealing clients from you, setting up in direct competition or sharing your confidential business information with others.
Putting a lot of these tips into practice would enable you to preserve your business in the event of marriage dissolution.
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