Your business is your baby and wanting to protect it amidst separation is a normal reaction—not selfish. It is likely one of your biggest assets, which is why it’s only right to ask what will happen to it when you divorce your spouse.
Before we discuss how you can protect your business during a divorce, let’s talk about what marital property is and if your business falls under it.
What is considered marital property?
Marital property is the property or assets acquired during a marriage. That said, if you started the business together, it is considered as marital property. But even if you started the business on your own, it may still be considered marital property if your spouse has played some role in its operation—no matter how small that role may be. Hiring a divorce lawyer can help tremendously if there is confusion about what assets you and your spouse own separately.
If you have signed a prenuptial or postnuptial agreement that designates your business as separate property, you will likely not have any more problems than necessary in this regard. The same is true if you have a shareholder agreement with your spouse if they happened to invest in your business.
But what if you don’t have a prenup nor a postnup?
The easy answer is that you will likely have to split your business either 50-50 or equitably, depending on the state you live in since it is technically marital property. You can try to find a work-around if you did most of the work in putting up your business, but know that you will probably not get to keep everything to yourself. Consulting with a lawyer is your best bet in this case, especially if you live in a Community Property state that employs the 50-50 rule when splitting marital assets.
If there is no way you can keep the business to yourself, here are other possible options:
Propose a trade
Offer other marital assets to your spouse in exchange for full ownership of the business. However, the asset that you trade should be close in value to the business. That said, real estate that you separately or jointly own is likely the asset that you could trade with your spouse or something equally valuable such as a luxury vehicle or high-value jewelry.
Compensate your spouse
If you have a bigger involvement in the business than your spouse, you can propose to pay your spouse in exchange for owning the business fully. This option is the most common way to handle a business in a divorce and is often the most amicable. However, it may not be the best option if both you and your spouse were heavily involved in the business.
Sell the business and split the profits
Another option that can consider is to sell the business and split the profits with your spouse. It may not be the most ideal option but is often the only one when the business makes up for most of the marital assets. Doing this will also give you the opportunity to find a fresh start somewhere, although it may mean you have to start another business from scratch.
Co-run the business
Say that you are going through a relatively amicable divorce with your spouse and that both of you play significant roles in the business. Neither one wants to part with the business nor sell it to split the proceeds evenly. If this is the case, you may want to consider co-running the business during and after the divorce is settled. With enough time and healing, it is possible to continue running a business successfully even if you are no longer together.
Although, this time, it is highly advisable that you come up with a shareholder agreement if you don’t already have one. If you are worried about your spouse one-upping you in this type of setup, protect your finances with the help of a lawyer.
How to protect your business before a divorce
Even if you are sure that your marriage will end happily ever after, there is no telling what the future holds. To protect your business in case you have to get a divorce, here are some important things that you should do:
Get a prenup
Or if you are already married, get a postnup that clearly states which assets will be considered marital property.
Use a partnership, shareholder, or LLC
that includes provisions that would protect the interests of other business owners in case one of them gets divorced.
Consider your spouse’s involvement
If you and your spouse started the business together, they are entitled to a share of the business. But if you played a bigger role in running the business, you may be able to protect it by limiting or eliminating your spouse’s involvement.
A divorce can greatly affect your business in more ways than one. If you want to minimize the impact on your business (and, in turn, your finances) learn how to protect your business even if the possibility of divorce is low.