Divorce can be a complicated and stressful process, especially when assets like a business are involved. If you’re a business owner and facing a divorce, it’s natural to be concerned about the future of your business. In this article, we’ll explore the ways divorce can affect your business and discuss strategies to protect it during the process.
How Divorce Affects Your Business
Business Partnership with Your Ex-Spouse
One possible outcome of a divorce is ending up in a business partnership with your soon-to-be ex-spouse. This can be an uncomfortable situation, especially if the relationship has become contentious. In community property states, you may have to give up half of the business or a similar amount in equitable distribution states, where equitable means fair, not necessarily equal.
Another potential outcome is dividing the business’s value with other marital assets. This may include a house, cars, vacation homes, stocks, bank accounts, retirement accounts, or valuable collectibles. Instead of dividing the business, you may be able to negotiate an arrangement where you keep the business, and your ex receives a larger share of the other assets.
In some cases, the court may decide to liquidate the business and distribute the proceeds between you and your ex-spouse. While this is generally an unfavorable outcome and courts are reluctant to do this, it may be deemed necessary by the divorce mediator or judge in certain situations.
Sabotage and Retribution
If your spouse is bitter about the divorce and wants retribution, there’s a risk that they may try to sabotage the business by contacting clients or taking other harmful actions. It’s essential to have a plan in place to prevent this from happening.
How Divorce Can Cost a Business Owner Their Business
Forensic Accountants and Business Valuation
During a divorce, a forensic accountant may be hired to determine the business’s value. If the business was started before the marriage and remains the separate property of the spouse who started it, the divorce may not have a direct impact on it. However, many businesses lose their separate property status during the marriage.
Marital Property and Business Value Increase
If the business’s value increased during the marriage, that increase could be considered marital property, subject to division between spouses. This means that the increased value can be subject to equal or equitable distribution.
Spousal Contributions and Business Formation
If your spouse contributed to the business or if the business was formed during the marriage, it’s considered marital property and subject to distribution. This doesn’t necessarily mean that a court will require money to come directly from the business to pay your ex, but it’s a possibility. There may be other ways to compensate your ex for their portion of the business without directly impacting the business’s finances.
Protecting Your Business in Advance
It’s crucial to take steps to protect your business in the event of a divorce. Here are some strategies to consider:
- Prenuptial Agreement: A prenuptial agreement can designate any future or existing businesses as separate property. To be valid, there must be full disclosure, the agreement must be in writing and signed in the presence of witnesses or a notary, and signing must be voluntary and not coerced.
- Postnuptial Agreement: Similar to a prenuptial agreement, a postnuptial agreement is entered into after marriage. These agreements are carefully scrutinized by the courts and may not always be upheld, but they can offer some protection for your business.
- Buy-Sell Agreement: This type of agreement can protect your business in the event of divorce, death, or the sale of the business. Consult a tax lawyer or a lawyer experienced in contract and business law to draft this agreement.
- Limit Spousal Involvement: The more involved your spouse is in the business, the more likely they will want a portion of it in the divorce. Keep their involvement minimal or nonexistent.
- Pay Yourself a Salary: Instead of reinvesting all profits back into the business, pay yourself a salary. This can help reduce your ex’s claim on the business’s value.
- Separate Personal and Business Expenses: Keep your business finances separate from your personal finances to maintain the business as separate property.
- Put the Business in a Trust: Placing the business in a trust can remove it as a marital asset, protecting it from division in a divorce.
Keeping the Business Going
If you’ve taken steps to protect your business during the divorce process, it’s more likely to continue operating smoothly and help with child and spousal support payments. In this case, your ex will have less incentive to tamper with the business’s success.
Divorce can be a difficult and emotional experience, and the potential impact on your business can add to the stress. By understanding how divorce can affect your business and taking steps to protect it in advance, you can help ensure its continued success and your peace of mind during this challenging time. If you’re uncertain about the best course of action, consult a business or family law attorney to help you navigate the process and protect your business interests.