Your business may well be your biggest asset, and one that you are emotionally attached to. In the event of divorce, you need to make sure that your business is protected. And that means protecting yourself well before the thought of divorce enters your mind.
The line between separate and marital property
Some examples of separate property are property you owned prior to your marriage, an inheritance solely in your name, or a gift in your name only from a third party. However, the separate status may become void if, for example, you deposit the inheritance into a joint account or you re-title your own property to include your spouse’s name.
Marital property covers all assets and income streams acquired by either spouse during the marriage. This runs the gamut from retirement funds to art and club memberships to real estate and closely-held businesses.
The definition of these types of property can also vary by state. In the nine Community Property States, both spouses are considered equal owners of all marital property. In the remaining Equitable-Distibution States, the length of marriage, each spouse’s earning power, and involvement in building the business are taken into consideration when coming to a settlement. It doesn’t need to be equal, but it does need to be equitable.
How to protect what you’ve built before marrying
With all that in mind, protecting yourself from day one should be a high priority. If you are not yet married, strongly consider a prenup, with separate representation for you and your to-be spouse. This is one of the most secure – and cheapest – ways to protect your business in the event of a divorce.
If you got married without a prenup in place, you can consider getting a postnup, but keep in mind that the courts may look upon these skeptically. A number of states don’t recognize the validity of a postnup. Even so, if it may be worth considering if you do not have a prenup in place.
How to protect yourself as your business grows
As your business grows, so will your need to protect it. Drawing up legal documents that address what might happen in a divorce with a business attorney can help protect your assets.
Set up a clear ownership structure. If your spouse plays a role in your business, a formalized company structure, including who has what role and percentage of ownership, can help mitigate the risk of loss. Under this ownership structure, separate accounts with the sole purpose of funding new projects under both partners’ names will take away any ambiguity as to where funding originated. That way, neither spouse can claim an asset as their own without talking to each other first.
Separate personal and business finances. Having a wall between your personal and business funds will help minimize financial impact in the event of a divorce. This may mean your spending habits need to change after marriage. If you used personal credit cards or loaned money out-of-pocket before, establish separate accounts and open credit cards solely for paying company bills after you tie the knot. Pristine record-keeping for every cent that goes in and out of your accounts can help establish separation during a divorce.
Put shareholders’ or operating agreements in place. As a business owner, you and other equityholders can negotiate to establish rights, restrictions, and/or obligations for those who have equity and are going through a divorce. These agreements can extend as far as to block the transfer of equity to the equityholder’s ex and allow the others in this group or the company to repurchase the divorcing equityholder’s units. It can also prohibit unauthorized equityholders from taking on managerial powers. Through this agreement, this group can agree on the manner of valuation of equity if a divorce occurs.
Consider spousal consents. These are common requirements for shareholders and used in tandem with shareholders’ or operating agreements. The spouse of an equityholder signs these consents, which ensure that he is aware of equity restrictions and transfers as well as confirming he will not claim an interest in the company on death of or divorce from their spouse. To ensure these agreements are enforceable, consider having them added into the pre- or postnup.
Bottom Line
Marriage can be time of bliss, but it’s important to remember that your peace of mind is critical. Protecting yourself and what you’ve built will help provide you with much-needed peace of mind as you embark on a new phase of life.
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