Sometimes, divorces are simple, amicable, and quick, and they offer both parties a clean break and a fresh start. Unfortunately, those times are relatively few and far between, and they almost never involve a business. When either partner owns a business, things can get messy very quickly. If you have a business, and you want to protect those assets during your divorce, here are a few things you should know.
You Must Plan Well in Advance
The reason protecting your business during a divorce is so difficult is that it straddles the line between “separate property” and “marital property” in most circumstances. Even if you had the business completely established and profitable well before you were married, your spouse may still be entitled to half of your business if you divorce. This is why it is so important to plan ahead and take steps to protect your business if this occurs.
Of course, when you get married, you want it to be “happily ever after.” But a healthy dose of practicality can prevent a lot of anger and frustration if that fairytale ending doesn’t happen. So, taking steps like getting a prenuptial or postnuptial agreement can go a long way towards protecting your business assets in a divorce. While a prenup is much more likely to hold up during a divorce, if you’re already married, a postnup can still offer your business some protection.
Keep the Business Separate
Throughout your marriage, it is best to keep business assets distinct and separate from your personal assets. This means that you should have a separate business account, and should pay yourself a competitive salary, rather than having all of the business profits come directly to you. How does this protect you?
If you owned your business prior to marriage, it is considered separate property, belonging solely to you. However, the moment your business assets mix or commingle with your shared assets, your business is at risk of losing its separate property status. So, if your business’s profits deposit to a shared bank account, and you then use that private account to reinvest into the business or make necessary business purchases, your company can now be considered marital property.
However, if you are only receiving a salary from the business, and only funds from a separate business account are used to reinvest and make purchases for the business, it is much more likely that your business will still be considered separate property.
Know Your State’s Laws
It’s also important to know whether you live in a Community Property State or in an Equitable Division State. Florida is an Equitable Division State, which means that divorce courts will usually consider factors like the length of your marriage, each spouse’s involvement in building the business, and so on, when deciding how to divide the business assets. Equitable Division States do not require settlements to be equal; they must simply be fair, when considering all factors of the divorce.
If you live in California, Arizona, Idaho, Nevada, New Mexico, Texas, Louisiana, Washington, or Wisconsin, then you live in a Community Property State. These states view each partner as an equal owner in any marital property, and a 50-50 division of assets is the rule of thumb. So, if you live in one of these states, it’s even more vital that you ensure your business maintains its status as separate property.
Reconsider Involving Your Spouse in Business Matters
When you’re happily married, you want to be partners in all aspects of your life. And, if you own a business, it might seem like a great idea to have your spouse involved with that business. However, if your spouse helps run the company in any way, contributes ideas that benefit your business, or is even employed by the business, they may be entitled to a larger percentage of the company. The more involved your spouse is with the company, the larger their percentage will be. So, think twice before you get your spouse involved in any business matters.
Last Resort: Buying Out Your Spouse
If you were unable to protect your business early on, and your soon-to-be-ex is now entitled to a percentage of your business, you do have the option of buying out your spouse—assuming, of course, that you don’t want to be business partners after your divorce. Buying out your spouse can happen in a couple of different ways.
The first is to offer other marital assets—cash, property, retirement accounts, stocks, etc.—as payment for their share of the business. Negotiating which assets you’re willing to give up in order to retain control of your company is a tricky issue, so you should always have your lawyer present when discussing these matters.
If you don’t have enough assets to offer up to cover their share of the business, you can also negotiate for a property settlement note. This is a long-term payout, and requires you to make ongoing payments to your ex to cover the value of their share of the company (plus interest). Once you’ve paid the agreed amount, you’ll be the sole owner of your business again.
If you need more advice on protecting your business from division during divorce, speak to one of our attorneys. We can help you draw up a prenup and offer guidance on how to handle business assets to ensure your company is protected. Or, we can help you to negotiate so that you retain control of your company after divorce.