They say it’s smart to keep personal and business relationships separate, but when you’re married, you and your spouse become one in every way – including business. If your “I do” turns into “I don’t” in the future, what will happen to your company?
Here’s how a divorce may impact your business.
Divorce and Business – Your Ex May Become Your Next Business Partner
Depending on the state you live in, your ex may become your new business partner when the divorce is finalized.
The way in which assets are divided in a divorce depends on state laws. A business is considered an asset, and it may be classified as either marital or non-marital property.
When a Business is Considered Marital Property
Generally speaking, assets acquired during the marriage are considered part of the marital estate, which means they will be divided between the spouses.
If you launched your business after you tied the knot, it will likely be considered marital property. But there are a few exceptions:
- Prenuptial Agreement: If you have a prenuptial agreement that designates all current and future businesses as separate property (i.e. not marital property), the company may not be divided in the divorce. While prenups are not a guarantee that your business will be saved, it adds an extra layer of protection. The agreement must be in writing, signed before you got married and signed voluntarily more than just a few days before the wedding.
- Postnuptial Agreement: A postnup is similar to a prenup, but is signed after you’re already married. While postnuptial agreements are highly scrutinized and not always upheld in court, it’s better to have one than nothing at all.
- Trust: If the business is placed in a trust, it may not be considered a marital asset.
- Inheritance: If the business is inherited, it may also not be considered part of the marital estate. However, the company’s increase in value during the marriage would be considered part of the estate.
None of the above exceptions are iron-clad. Even if you have a prenup or you inherited the business, your spouse may get a piece of the pie if he or she played an integral in building the company (e.g. worked for you or with you).
If a business is considered marital property, it will be divided along with other marital property.
“When two people decide to divorce, one life must be divided into two,” says Maxim Law, a law firm that specializes in divorce. “During that process many important decisions regarding property division, child custody and spousal and child support must be made. These decisions have a great impact not only on parent-child relationships and family structure, but also on each spouse’s financial health for years to come.”
Don’t panic just yet – there’s good news. Most businesses aren’t actually divided up in a divorce. In most cases, one spouse gives up other assets in order to maintain ownership of the business. In order to do this, an evaluator must be hired to determine the value of the business. Once the value is determined, the courts can ensure that the other spouse receives an equal or fair equivalent of assets in exchange for giving up an interest in the company.
A buy-sell agreement may also help protect your business and prevent your spouse from taking an interest in the company. A business lawyer can help you work out the logistics and determine whether this will benefit your company.
When a Business is Considered Non-Marital Property
A business may be considered non-marital, or separate, property if:
- It was launched prior to getting married
- You have a prenuptial or postnuptial agreement in place
- The business is owned by a trust
- You inherited the business
When a business is considered separate property, the other spouse will generally have no interest in the business. But there are some issues that may complicate things.
If you decide to transfer an interest of the business to your spouse during the marriage, that interest instantly becomes marital property. If the interest is gifted, it may become your spouse’s non-marital property. If the interest was purchased, it may become marital property.
Another complication is business expansion. If you grow or expand your business during your marriage, the court will look at your source of funding for the expansion. If you used funds from your marital estate, such as savings or a shared credit card, the expanded portion of the company may be considered part of the marital estate.
Also, if you work in the business, your compensation will be considered marital – even if the business is non-marital. Retained earnings may even be considered part of the marital estate.
Protecting a business from divorce can be complicated and challenging – but not impossible. Working with a good lawyer who has experience handling complex divorces will give you the upper hand.