Starting a business and getting married are two major life events that nobody anticipates to fail, but divorce or separation can happen to anyone, and it can threaten the survival of your business. To prevent this, it’s essential to plan ahead and take steps to protect it.
If you own a business before getting married, you can consider seeking a prenuptial agreement that clearly defines the business as your separate property. It can help you designate the differences between non-marital assets that will not transfer interest between both parties (i.e. vehicles owned before marriage, businesses, etc.) and marital assets that both parties will now share (i.e. house, retirement accounts, etc.). Placing your assets in a trust can also provide some protection, but keep in mind that your spouse may still be entitled to a portion of the assets accumulated during your marriage.
What Happens to My Business After a Divorce?
It all depends on how you plan. A prenuptial agreement can state that your business remains your separate property, but it is not a hardline rule that a judge must follow. Factors such as your children and their needs will also be considered in deciding how much of the joint assets—including business ownership—should be awarded to each spouse during a divorce. Considering alternate strategies is imperative to protecting your business and all that you have built.
Strategies for Protecting Your Business Ownership in Divorce
Sometimes, divorces are amicable enough that both parties can carry on a civil relationship after the marriage is over. If this applies to you and you own a business with your spouse, you can continue operating the enterprise after divorce.
If you cannot maintain a professional relationship, you may have to sell the business, unless you have a buy-sell agreement already in place. The following provides an overview of potential strategies for protecting your business ownership in the event of a divorce.
Establishing Sole Ownership
When you establish your business, you can add provisions to your organizing documents that clearly state you are the sole owner and that the business cannot be transferred in the event of a divorce. This helps ensure that you are the only one with legal ownership and control over the business and your spouse has no legal claim to it in the event of a divorce.
Using a Buy-Sell Agreement
To safeguard your business ownership in the event of a divorce, you can establish a buy-sell agreement in your organizing document if you co-own the business with others, including your spouse. This agreement can restrict your spouse's capacity to acquire the business. It can also eliminate their voting rights and grant you or your partners the option to purchase the business at a predetermined, reduced price.
Using a Trust
You can also place your business in a trust, which technically means that the trust owns the business, not you. This can potentially keep the business from being counted as a marital asset, but you need to be cognizant of how the state in which you reside treats trusts when it comes to divorce.
To help with this, consult an estate planning attorney familiar with your state's divorce law before making any decisions. Also, placing your business in a trust may have other implications, such as tax consequences, so it's important to consider all factors before deciding to proceed with this strategy.
Purchasing Whole-Life Insurance
Another strategy to protect your business ownership in a divorce is to purchase whole-life insurance. Whole-life insurance is a type of permanent life insurance that provides coverage for the entirety of the policyholder's life, as long as premiums are paid. Unlike term-life insurance, which only provides coverage for a set period of time, whole-life insurance has a cash value component that builds up over time. If a business owner with a whole-life insurance policy goes through a divorce, they may be able to use the cash value of the policy to buy out their spouse's share of the business.
The cash value component of a whole-life insurance policy accumulates tax-deferred, meaning that you will not pay taxes on the growth of the cash value until you withdraw it. As the policyholder, you can access the policy's cash value in several ways, including taking out a loan against the policy or surrendering the policy for its cash value.
This can help you retain full ownership and control of the business, even in the event of a divorce settlement. Remember that it's important to consult with a financial professional and a trusted attorney before finalizing any decisions.
Don’t Jeopardize the Future of Your Business
If you’re a business owner, it’s important to take steps to ensure that your enterprise can survive any hardship in your relationship, including divorce. Our attorneys at Kelleher + Holland, LLC can help you protect all your assets and will represent your best interests in the case of divorce.