May 4, 2015
Is Your Ex Entitled to Half Your Business?
They might be, if you don’t take preventive legal steps to protect it.
In the interest of full disclosure, I want to state, up front, I am not a family law attorney. If you need a divorce, please, call someone else. I can help you, however, if you have a business and you are concerned that someday your marriage will contribute to the unfortunate marriage statistics in the U.S. After all, 52% of all first marriages end in divorce; 70% of second and third marriages end in divorce. So, it makes sense to take precautions, even if you’re head-over-heels in love with your spouse.
“In order to be effective, … protective methods must be in place well before the thought of divorce enters anyone’s mind. Obviously, something like a prenuptial agreement needs to be signed before the wedding (and please not the night before), but techniques such as transfers to an irrevocable trust need to be done years in advance. Depending on your state’s fraudulent transfer laws, transactions can be voided up to seven years after the transfer. If you and/or your spouse are even slightly thinking about divorce, it’s probably too late to take any protective measures.”1
I’m going to assume my reader is already married. If you’re not already married, have your lawyer prepare a prenuptial agreement (a “prenup”) for you, now. You can always fill in the blanks, later. Please ask the drafting lawyer to include the cost future edits to the prenup, as needed, in the fee he or she charges you (and get your contract for legal services with your lawyer in writing).
If you are a partner in a partnership or a member in an LLC, your parternship agreement or operating agreement (referred to as an “LLC Agreement” in some jurisdictions) may protect the other partners’ or members’ interests in the event that one partner or member (an “owner”) becomes divorced. At a minimum, such agreements between a business’s owners should include:
- “A requirement that unmarried shareholders provide the company with a prenup agreement prior to marriage along with a waiver by the owner’s spouse-to-be of his or her future interest in the business.”1
- “A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business.”1
Also, be careful how much you are paying yourself. If you leave in your business more of the wealth you have accumulated by operating it–assuming your business is adequately protected from your spouse–you may be in a better position to recapture that wealth after a divorce, without having to worry about paying your spouse half. It should go without saying that the more involved your spouse is in your business, the stronger their claim will be to a share of the business in the event of a divorce.
Finally, you always have the option of paying off your spouse. This can be done in a number of ways, using a variety of sources of funds. Consider giving up some of your share of the marital property in order to retain ownership of the business. Which is worth more to you: your business or some object that is always going to be a painful reminder to you of your (ex-)spouse? You might even consider selling the business and dividing the proceeds from the sale of the business. Sometimes, this is the last resort anyway, when you forego proper prior planning.
1 Landers, J. (2010, March 25). How to Protect Your Business in a Divorce. Retrieved May 1, 2015, fromhttp://www.inc.com/guides/2010/05/protecting-your-business-from-divorce.html
- Tice, C. (2011, August 8). How to Divorce-Proof Your Company. Retrieved May 1, 2015, fromhttp://www.entrepreneur.com/article/220124
- Brandt, J. (2012, August 2). How to Minimize the Impact of Divorce on Your Small Business. Retrieved May 1, 2015, fromhttp://smallbusiness.foxbusiness.com/entrepreneurs/2012/08/02/how-to-minimize-impact-divorce-on-your-small-business/
- Wagner, S. (2015, April 30). How to Protect Your Company From Your Business Partner’s Divorce. Retrieved May 1, 2015, from http://www.entrepreneur.com/article/244601
- Moses, M., & Uitto, J. (2010, December 21). Divorce Planning in Tennessee: Pre-nuptial, Post-nuptial Agreements and Trusts. Retrieved May 1, 2015, from http://www.tba.org/journal/divorce-planning-in-tennessee-pre-nuptial-post-nuptial-agreements-and-trusts