Most people going through it know that divorce is not only emotionally trying, but also that there will likely be unwelcome financial consequences. Entrepreneurs and business owners, however, face the additional potential of a significant negative impact to their business — in some cases the whole company is at risk, even if it’s thriving.
Due to the added complexities, these matters require more attention and experience from attorneys. Freed Marcroft’s lawyers are adept in assisting entrepreneurs and business owners — including corporate executives, restaurateurs, and business-owning professionals like physicians, lawyers, and CPAs — navigate these issues.
Here are six steps all business owners should take well before there is even a specter of divorce. If your marriage thrives, wonderful! If it doesn’t, at least you have done what you can to shield your company, partners, and employees from the fallout of a possible divorce.
1. Before You Marry, Enter Into A Prenup. Before you marry, enter into a prenuptial agreement that designates your business as separate property, nonmarital property owned by only you.
2. If You are Already Married, Consider Additional Legal Tools. If you’re already married, consult with us regarding whether it might be wise to enter into a postnuptial agreement. If your business has two or more owners, you should also consider additional legal tools. These include buy-sell agreements, which detail in advance the terms for transfer of ownership, shareholder agreements, which can set limits on the ownership and voting rights of a founder’s ex-spouse, and trusts.
3. Obtain insurance. A life insurance policy that builds cash value can be liquidated, if necessary, to provide funds to buy out your spouse’s share of the business. This helps ensure that your business won’t need to be sold in order to provide your spouse with his or her share. If your marriage remains solid, great. The cash in your policy is available for other purposes.
4. Pay Yourself. May sure that you draw reasonable compensation for your work. This helps defeat a spouse’s argument that he or she is entitled to a share (or greater share) of the business because rather than taking income, you used marital assets to support your business. This may have the additional benefit of strengthening your marriage — it is very common for divorcing people in these situations to cite financial strain as a major factor in the breakdown of their marriage.
5. Do Not Commingle Personal and Business Assets. Keep your business finances separate from your personal assets. If you don’t, you strengthen a spouse’s argument that he or she is entitled to part of your business. This is good advice even if you never face a divorce — in order to protect your personal assets from exposure to business liabilities or lawsuits, it is essential that you not commingle your personal assets with your business assets. As an added bonus, you’ll make your business lawyer and accountant happy.
6. Okay, But How Do I Discuss This With My Spouse? Many happily married people cringe at the thought of telling their spouse that they want to protect their business in the event of a divorce. Explaining the practical reasons behind your legal planning can help a spouse understand that it isn’t motivated by a lack of trust or because you are in any way contemplating a divorce. If you have co-owners, you may choose to explain that all owners have decided that they want to insulate themselves and their families from the potential impact of another owner’s divorce. You can also share that investors, employees, lenders, customers, and extended family rely on the stability of your company, and taking appropriate measures to ensure that stability will help your business succeed.
Freed Marcroft’s attorneys guide select clients through the nuances involved in advance planning to avoid the negative consequences involved in entrepreneurial divorces, and, when necessary, represent business-owning clients in divorce.