How to Protect a Business From the Fallout of Divorce
Marriage and business often go hand-in-hand. Frequently in this economy, one spouse or both spouses may own their own business or both spouses may even own a business together. The creation of a successful business requires a lot time and hard work and is likely to be the most important financial asset in a marriage. Unfortunately, more than half of first marriages in the United States end in divorce as do the majority of second and third marriages. Therefore, divorce and business also go hand-in-hand, and business owners should be properly protected when going through divorce.
If a spouse helps run a company, contributes ideas to the business, or is even employed by the business during the marriage, he or she may be entitled to a portion of the business. In short, the more a spouse is involved with the business, the larger the piece may be. There are a range of tools that can help protect a business owner’s assets from property division in a divorce. Some tools like prenuptial and postnuptial agreements apply to the marriage and other safeguards, such as a buy/sell agreement, are incorporated by the business.
Protections that Apply to the Marriage
A well-crafted prenuptial agreement can govern the division of assets in divorce. It is an enforceable contract signed by both parties before marriage that outlines what property will be considered separate, what property will be considered marital property, and how the marital property should be divided in the event of a divorce. Without one, divorcing couples are left to the property division rules of Florida, which require that marital property is equitably not equally divided. While a prenup may not always be enforceable, it is more likely to be enforceable when
- Both parties are represented by attorneys
- The agreement is in writing
- There is full disclosure of assets
- The agreement is not unconscionable
- It is executed voluntarily and without coercion
If a prenup is not an option, a postnuptial agreement may be. A postnuptial agreement functions just like a prenuptial agreement except that it is signed after the marriage. A valid postnuptial agreement must meet the same requirements of a valid prenup. Protections that Apply to the Business
There are a number of ways a business owner can protect her or his interest in the business and the interests of the other owners of the business. Partnership, shareholder and operating agreements may include provisions that can protect the interests of the other owners if one of the owners goes through divorce. For example, an operating agreement may include a prohibition against the transfer of shares without the approval of the other partners or shareholders and the right of partners and shareholders to purchase the shares or interest of one or both divorcing parties so that the control and ownership of the other owners is not diluted.
Another strategy to protect the business from divorce concerns salary or pay. Frequently, business owners pay themselves small salaries in order to reinvest the amount that would have been paid as salary back into the business. However, in the context of divorce a soon to be ex-spouse may claim he or she is entitled to more money or a larger share of the business because potential earnings went back into the business rather than the household. Therefore a business owner should pay her- or himself a reasonable salary to avoid such a claim.
As mentioned above, the more a spouse helps or contributes to the business, the more he or she may be entitled to a percentage of the business in the event of divorce. To avoid that risk, think about whether a spouse should participate in the business at all.
Finally, if the business owner is not able to properly protect the business and a former spouse is entitled to an ownership interest there are a number of ways to settle the issue if the former spouse will no longer be a business partner post-divorce. The business owner may use a property settlement note, which is a long-term payout in the amount of the ex-spouse’s share of the business. Another option is the business owner may use his or her share of marital assets, such as real estate, cash, or retirement funds, to settle the interest. The most extreme and most disruptive method to settle an ex-spouse’s interest in the business is to sell the business and divide the profit.
If you own a business and are considering divorce in Florida, contact an experienced divorce attorney to discuss the best strategy for your situation.
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