It takes a very pragmatic couple to be comfortable with the fact that there is a possibility their marriage may not last and that legal steps must be taken to protect the business of one of the spouses or the family. Most, however, are in the throes of love and any mention of prenuptial agreements, trusts, or other financial protections is decidedly unromantic. It may cause hard feelings between partners.
However, in today’s environment, it pays to work through the discomfort in order to protect the future against the rocky shoals of divorce, when emotions again run high, and it can be difficult to think clearly and fairly.
Is Your Business at Risk During a Divorce?
To be blunt, a divorce can destroy your business. You have invested time and money into a venture that can be lost the minute you and your spouse decide you no longer wish to be married to one another. And it doesn't just impact you and your soon-to-be-ex-spouse. You will have risked the livelihoods of your employees, too, if you do not take legal measures to protect your business.
Even if your business started before the marriage, in many states community property laws and other rules allow a spouse to claim half or more of any value that has appreciated in the business since you got married.
Debt is also a problem.
- After marriage, spouses share the debt.
- If your spouse has debt, collectors, and creditors may still try to obtain your business assets to pay down your ex’s debt after a divorce.
Don’t let the rosy outlook of romance blind you to potential hazards in the future. We all would like to think it’s forever, but more than half of us will find out it is not. Since you can’t predict the future, you need to protect it.
Protections Against Business Loss in a Divorce
The most common protection couples turn to is a prenuptial agreement. The “prenup” is an agreement between you and your spouse-to-be, signed before the marriage, about the division of assets in the event of a divorce. It is a contract that is backed with the full force of contract law and can even negate property division laws in states recognizing community property.
However, there are some limits to prenuptial agreements.
- A prenup that is drafted by the same lawyer for both partners weakens the enforceability of the agreement. Each partner should have his or her own counsel.
- Contributions a partner makes to the business in time or money can change part of the business to a marital asset that is not protected by the agreement.
- Marital finances used towards the business also weaken the agreement.
Other protections you can use if a prenuptial agreement is not signed include a buy-sell agreement, a domestic or foreign asset trust, a post-nuptial agreement, or an agreement to continue as co-owners made during the marriage or as part of a divorce settlement.
Of these, the post-nuptial agreement may be the weakest protection since some states do not recognize them and they are challenged and invalidated more often than prenuptial agreements.
Including Your Business in a Prenup
When you structure a prenuptial agreement, you and your future spouse are making a decision now about whether your individual assets should be kept separate or become marital property. If you want to protect your business, you need to keep any appreciation of the business as a separate asset or pre-marital property.
Along with your business, a prenuptial agreement should also cover your pre-marital assets as well, to ensure complete business continuity.
Address debt that may be incurred during the marriage in your prenup. Some states treat debt as another form of community property so even though the debt was created by your spouse, you may still be responsible for it.
If your business is co-owned with partners, have them sign the prenup as well. In fact, many partnerships and operating agreements require unmarried shareholders to obtain a prenup before marriage. The prenup contains a waiver of interest in the business and a stipulation that shares transferred to the spouse must be approved by the partnership.
To create a strong prenuptial agreement that will stand up to any challenge, maintain all of your business records before and during the marriage. Accurate records of business transactions are critical to establishing your earning capacity before the marriage and justifying the value of the business if is it considered a separate asset.
Good records also prove that marital and business assets remained separate at all times.
The decision to be married should never be taken lightly. When one partner has built a business before the wedding, it should be protected from future problems, including a divorce. While it sounds like you and your partner do not trust each other if a prenuptial agreement or other financial protection is created, you are both doing the smart thing and ensuring the ripples of a broken marriage do not become the tsunami that sinks a partner’s ability to make a living and continue as an employer.