When people get married, they still expect a “happily ever after,” but the tragic truth is that 52% of all first marriages and 70% of second and third marriages are dissolved. Although divorce is difficult for everyone, it can be even harder if one or both partners own a company or joint business. Perhaps the most valuable financial asset you own is your firm.
Innumerable hours and money have been spent cultivating and increasing it. It is tough to accept that you could accidentally do something that may jeopardize your business in the event of a potential divorce.
Tackling the particular problems of splitting a company/ business
According to mensgroup.com, the division of assets is one of the most contentious topics in a family business divorce. It is hard enough if it includes simpler things like real estate, cars, and money, but if you have a business, alone or with your spouse, it can be especially tricky to split. Your spouse may be entitled to up to 50 percent of your company in a divorce, depending upon the particular circumstances.
Since you probably don’t want your former spouse to remain a business partner in your life, what can you do to protect your company? To answer this, let’s first understand the concept of marital and Non-marital business.
Marital against non-marital business
Initially, a company established before marriage by you or your spouse will not be considered a marital possession and can not be divided during the divorce. However, revenue from this sector is almost always taken into account when providing child care and sustenance.
According to californiaonlinedivorce.com, a company started during the marriage is marital property, and its interest must be divided in case of divorce. If you and your partner own the company together, it can be challenging to split the assets because you may both want to continue to run the business.
With special arrangements that protect your rights and decision-making power, couples who divorce can make this job convenient.
While there are variations between different states, the separate property usually includes:
- Property and business possessed before the marriage
- A legacy earned only by one partner
- Any gift received by one partner
Warning: Separate properties lose this status if combined with marital property. For example, when you add your husband as a partner in your company or transfer your business ownership to your spouse, it becomes marital property.
Tips to Protect Your Business In case of Divorce
Creating differences among legal, financial, and emotional questions
Divorce is not only a civil separation. You have to decide on how to handle your business, finances, children, and more. You can manage this by combining issues such as legal, financial, and emotional. You also need to differentiate between the problems, needs, and positive outcomes. A break up complicates everything. So you need to untangle it. To do this, there are some steps you have to take, starting by taking the time to determine your specific goals and expected results with simple, independent priorities and strategies in all areas.
Don’t do it on your own
During the divorce process, you will need legal and emotional help. There are several ways a business can be split. To decide what is best, you have to sit down and figure out what works for you.
While you might be able to embrace legal and financial aid, do not forget that it benefits you emotionally to have people on your side. In a divorce situation, when you fail to work together and bring personal issues into the workplace, running a company can be extremely difficult. To save your prestige and business, build a team of colleagues, family members, and experts to rework all facets of your relationship.
Take a break
When a couple separates, taking a break may be the only way the couple can work together. Immediately after a divorce, each spouse needs transitional time, no matter how unpleasant it is. It is best if you take the time to consider what you want before making any rash decisions.
Think twice about your spouse’s engagement in your company
All or part of your company may be marital property. If your spouse worked for, supported, or contributed to the business in any way during your marriage, they can demand a considerable portion of your company. The more your spouse invested in your company, the higher the percentage. Your spouse will get a percentage of your income if you are partners in your business.
Steps to take to protect Your Business in case of Divorce
Protect your business in a divorce: pre- and post-marital arrangements
A prenuptial agreement is a document negotiated and signed by both parties before their marriage. It stipulates how property rights and responsibilities will divide in case of a separation. A well-drafted prenup will ‘superimpose’ both Community Property and Fair Distribution State law, and courts will typically comply with these agreements, making them an incredibly powerful tool to protect your business.
In some cases, prenups can be very complicated, so it is crucial to have them drawn up using competent legal counsel. Each spouse should be represented by a lawyer to strengthen them. Prenups will include the following essential elements in most jurisdictions:
- The agreement must be written (no oral prenups).
- It must be done willingly and without coercion. If consent wasn’t voluntary, it could cause the prenup to be disqualified.
- Complete disclosure (no hiding of assets) – this is another way to invalidate a prenup.
- It should be carried out by all sides, preferably before witnesses (or notaries).
In the prenuptial agreement, the parties will have to determine separate and marital property (including any businesses) and how marital property should be divided. A prenup can be one of the simplest and cheapest ways to avoid possible divorce issues in the company.
If you do not get a prenup, a postnuptial agreement may be an option. It is like a prenuptial agreement only, as the name suggests, it is signed after marriage. A postnup will contain the same essential elements as a prenup.
Redefine your role in case of divorce
Once you redefine your relationship after divorce, your roles and obligations at work will be transparent. You can identify what job each person is going to do so that you don’t micromanage each other. Working together does not need to involve constant cooperation, with specific responsibilities and communication, which can be more stressful and lead to more emotional reactions. You can define how or if both of you will continue to work together by identifying roles.
How to ‘pay your Partner if you are not able to save your relationship.’
If you can not properly secure your business for any reason, and now your spouse has a right to ownership interest, here are several options for paying it off.
One spouse can purchase
The most common approach for dealing with a joint business is for one spouse to buy the other spouse’s share. A common issue with the buyout option is that it only works if one spouse is willing to purchase the other spouse’s share and has enough money or other liquid assets to achieve it. The buying spouse may also receive funding from a commercial bank or a third party lender to provide adequate collateral to purchase the other spouse’s interest.
Selling the company
When buying out your spouse is not a feasible option, the next possibility is to sell the company and split the proceeds. It is a common practice used to separate other forms of property, such as the marital home. Nevertheless, without a court order, the company can not be sold if one partner insists on continuing the business.
If both parties consent, the sale of a private corporation will depend on marketability, income, and economic circumstances. An impartial third party interested in buying the company for strategic or tactical reasons might be difficult to find, and it may take several years to sell the company.
A final option for dealing with a company after the divorce is to remain co-owners. Though the emotional and psychological issues that destroyed the marriage may remain after the divorce, friendly spouses can continue to work together and manage the business.
Through mutual discussion, the partners may decide that only one will be solely liable for the company’s operations, and the other will earn a proportion of potential income to fulfill his or her share of the marital assets. Depending on the company’s potential success, each spouse risks receiving more or fewer assets through co-ownership.
You may be interested in: “What Happens to your Business After Divorce?”