‘Happily ever after’ is what married couple want to achieve. Unfortunately, it’s often inevitable due to one reason or another. Depending on your personal circumstances, there are things needed to settle when divorce is inevitable. One of such things is your business.
Your business is an asset, and no matter how hard you work on your business, putting in long hours doesn’t protect your business from a divorce. You can take steps to protect your business, and it’s not too late to start taking those steps now if your marriage is, alas, faltering.
If you’re about to begin divorce, you can implement the following strategies to help safeguard your business:
1. Remove Your Spouse From Your Business
The courts will consider the role your ex had in the business when determining if he or she has a legitimate stake in the business. If your soon-to-be ex worked day and night to help grow your business, the courts will take this into consideration.
If your spouse gave up his or her career so that you could grow your business, this will also be considered.
Lawyers recommend removing your partner from the business as soon as possible. You can be almost certain that your partner’s lawyer will argue that your spouse helped build and grow the business if they’re actively involved in the day-to-day operations.
Your partner may profit from this growth, too.
By removing your ex from the business’s operations, you ensure that his/her potential stake in the business doesn’t continue to grow.
2. Separate Family and Business Expenses
Do you pay your home’s bills out of the business’s bank account? Do you offset time between invoices by dipping into a joint savings account? If so, you’re putting your business at risk during a divorce.
And it’s going to be very difficult to prove that your spouse hasn’t been a major part of the business if you’re mixing business and personal finances.
A key to protecting your business from divorce is:
- Maintain good records
- Keep business accounts separate from personal accounts
You need to keep your family’s finances separate from your business finances. If you co-mingle these expenses, you’ll have a harder time proving that your family’s finances didn’t help support the business.
Here’s a good example: John starts a sandwich shop and takes out a business loan to get his operations up and running.
John’s shop is going well, but a year down the road, he needs to add three deli slicers because his operations are growing. If John decides to use his family’s checking or savings account to pay for these expenditures, his wife can argue that the family’s finances helped spur the business’s growth.
It’s better to take out a new loan or to use a line of credit to pay for these unexpected expenses.
3. Don’t Sacrifice Salary for the Future
This is a difficult subject for many business owners to understand. Business owners view their business as an extension of them, and while this is true, this extension shouldn’t lead to you sacrificing your family’s lifestyle to build the business.
An example of this is forcing your family to live on $40,000 while you could pay yourself $250,000 a year.
The idea is a novel one, but it’s not going to go in your favor if you get divorced. A lot of business owners will keep a high cash flow in their business, sacrifice their own salary for the business and sell the business in the future as part of their retirement.
When divorce occurs, the opposing lawyers will argue that the plans to sell the business and retire together are now broken, so your ex deserves a share of the business.
Even retirement accounts will be part of the marital assets.
4. Utilize Legal Safeguards and Tactics
Legal safeguards and tactics are able to help you safeguard your business from a divorce somewhat. There are times when these safeguards can be overridden, but they will help strengthen your claim for full control over your business.
A few of the legal measures every business ought to incorporate are:
- Sign a prenuptial agreement to help designate martial and personal property.
- Create a buy-sell agreement to define what happens when an owner’s status changes in a business. This agreement can limit your spouse’s control and stake in the business.
You also have the option of placing the business into a trust or can sign an agreement after the wedding that ensures the business remains in your possession after a divorce. A postnup should be signed 7+ years before the divorce to lessen the risk that the signing was done via intimidation or coercion.