How to Protect Your Business in a Divorce

If you are a business owner, the best time to protect your business from divorce is before you are married. The second best time is now. Whether you are a shareholder in a closely held corporation, a member of a limited liability company (LLC), or a sole proprietor, it is essential to safeguard your interests and those of your company from the potential consequences of a divorce.

In this article, we will discuss how to protect your business in a divorce and the steps you should take before you get married. Because many people don’t think of protecting a business from divorce until trouble is on the horizon, we will also explore steps you can take after marriage to keep your business safe in the event of a divorce.

How Divorce Can Affect a Business

Understanding how to protect your business in a divorce requires a basic understanding of how property is divided in divorce. In Maryland, Virginia, D.C., and most U.S. states, marital property is divided under a system of equitable distribution. That means courts divide marital property in a way that the deciding judge thinks is fair under all the circumstances—and typically (though not always), that means roughly equally. (Of course, divorcing couples can also work out their own division of property, which courts will generally approve.)

Not all property is considered “marital” property for purposes of equitable distribution. Generally, marital property is any asset acquired by either spouse during the marriage. To the extent a business was acquired or grew after the marriage, it can be considered a marital asset. When one spouse owns a business, that business may constitute a large percentage of the marital estate.

That means that when it comes time to divide the marital estate, the non-business owner spouse could be awarded part of the business or of its value. A skilled divorce attorney may be able to help you exclude all or part of your business from the marital estate, depending on the circumstances.

Protecting Your Business From Divorce—Before Marriage

For business owners on the threshold of marriage, a prenuptial agreement is one of the best ways to safeguard their business interests in the event of a divorce. A prenuptial agreement allows you and your future spouse to define what you will consider marital and non-marital (separate) property for purposes of equitable distribution should you ever divorce. If a divorce ever comes to pass, both spouses would save the time, money, and stress that comes with trying to value a business and divide it.

The problem with making a prenuptial agreement, of course, is that it raises the specter of divorce when you are supposed to be planning to be together forever. At this romantic time, some people can’t even imagine that they might ever divorce; others worry about the possibility, but don’t want to “burst the bubble” by suggesting a prenup to their partner. While a prenup is one of the smartest moves you can make to protect your business before marriage, there are other protective measures you can take.

In some jurisdictions, placing a business in a trust before the marriage can keep the business from being considered marital property, but that depends very much on the type of trust and how it is structured. Even then, it is possible that any increase in the value of the business during the marriage could be considered marital property.

In any case, one very important step to take before marriage to protect your business is to have the value of the business determined as of the date of the marriage (or thereabouts). That way, even if part of the business is determined to be marital property, you will also have clearly specified a portion that is non-marital.

Protecting Your Business From Divorce—During Marriage

If you are like many business owners, you may not have executed a prenuptial agreement to protect your business from divorce, but that doesn’t mean there is nothing you can do after marriage to protect the company.

Some measures include:

• Creating shareholder agreements (for corporations) or operating agreements (for LLCs) that prevent equity in the company from being transferred to the ex-spouse of an owner (equity holder) in a divorce; allow other equity holders to repurchase the interest of an equity holder who is divorcing; and decide in advance how equity will be valued in the event of an equity holder’s divorce.
• Enter into a postnuptial agreement with your spouse as soon as possible after marriage (and preferably before divorce is being discussed); the agreement can specify that the business is non-marital property, and even that any value added to the business after marriage will be considered non-marital property.
• Keep business and personal expenses separate. The more you intermingle your personal funds with those of the business, the harder it will be to assert that the business itself is not a marital asset.
• Pay yourself a fair salary from the business rather than reinvesting all profits into the business. If your spouse works for the business, pay them fairly, too, so that they cannot later argue that they accepted lower pay with the understanding that they would have an ownership interest in the business.
• Maintain clear records of the source of capital for the business, especially if that capital came from premarital funds.
• Make yourself the face of the business by being active in the business origination side of things as much as possible. This relates to a concept known as “personal goodwill,” which is an element of a business’ value that is generally considered non-marital. For more on this, consult a divorce attorney who is adept at business valuation issues.

When Your Spouse is Also Your Business Partner

All of the above recommendations assume that your spouse is not a partner in your business. If your spouse does happen to be your business partner, and you have not discussed what would happen to the business in the event of a divorce, you run the risk of both your personal life and livelihood being disrupted by the end of your marriage.

If you are in a position to have this discussion with your spouse, do so. If your relationship has deteriorated to the point where that is no longer possible, it is time to speak to an attorney on your own without delay. It may make sense for one spouse to buy out the other out of the business by giving them an equivalent share of marital assets if possible. Be aware that disagreement about the business’s value can make agreeing on a buyout nearly impossible without the help of an attorney.

Protecting Your Business When Divorce is Imminent

The unfortunate reality is that many business owners don’t think about how to protect their business from a divorce until they are facing one. If that is the situation in which you find yourself, you need to consult an experienced family law attorney as soon as possible. Your business may be one of the largest assets in your marriage, if not the largest. Investing in the services of a skilled attorney is an investment in the future of your business and your own financial well-being. To learn more about how to protect a business from divorce or to discuss your situation, contact Strickler, Platnick & Hatfield to schedule a consultation.