How Does Divorce Impact My Business?

How divorce affects your business

If you own a business, divorce can put you in a situation you don’t want to be in. You could end up being in a business partnership with your soon-to-be ex-spouse. You may have to give up half of the business in community property states or a similar amount in equitable distribution states, where equitable means fair, not necessarily equal. None of these scenarios are what you had in mind, but this is exactly what could happen in a divorce if you don’t take steps in advance to protect your business.

Giving up half the business could mean that other assets can be paid to your ex. An example is where a couple owns assets including a house, cars, maybe even a summer home, stocks, bank and retirement accounts, and maybe some valuable baseball cards and rare coins. Instead of giving your ex half of your business, these marital assets can be divided so that you keep your business and your ex gets an extra share of the other assets. It allows for a hands-off approach towards your business—a business you worked hard at creating and growing.

Another possibility is the liquidation of your business with you and your ex splitting the proceeds. Most courts are reluctant to do this, especially if the business was paying the family bills. In some cases, however, this may be the only solution that works according to the divorce mediator or judge.

What if your spouse wants retribution and starts calling your customers or sabotaging the business? Plans have to be put in place to prevent this from happening too.

How can divorce cost an owner their business?

In many cases, a spouse can get a forensic accountant to determine how much the business is worth. If the business was started by one spouse before the marriage, then getting a divorce may not impact it if it is able to remain the separate property of the spouse who started the business. The problem is that many businesses lose their status as separate property during the marriage.

If the business increased in value during the marriage, that increase in value could be considered marital property. Anything that is considered marital property is fair game and can be divided between the spouses. In this scenario, the increase in value can be subject to an equal or equitable distribution.

If your spouse contributed to your business then the business is marital property subject to distribution. If the business was formed during the marriage, it is also marital property and subject to distribution. That doesn’t mean necessarily that a court is going to have money come from the business to pay your ex, but that could happen. There may be other ways to compensate your ex for what his or her portion of the business is worth without the money coming directly from the business.

The better practice is to know that business and divorce do not mix. Even if this was a husband and wife business, you can be protected if you take steps in advance in case you no longer are married business partners.

How can you protect your business in advance?

There are ways to protect yourself ahead of time so your business survives your divorce. Some of the strategies are straightforward and are fairly routine. Others require a bit of imagination. You can:

1. Get a prenuptial agreement. While a prenup is not guaranteed to save your business, there’s a good chance it will. In it, you will designate any future businesses or businesses which have already started as separate property. There must be full disclosure to your fiancé. The agreement must be in writing and signed in the presence of witnesses or a notary, and you cannot coerce your soon-to-be spouse to sign. Signing has to be voluntary and not done a few days before the wedding, otherwise a court can declare the prenup null and void.

2. Get a postnuptial agreement. A postnup is an agreement much like a prenup but it is entered into after you are married. Courts carefully scrutinize postnups because spouses are signing their rights away. Postnups are not always upheld by the courts, but they’re better than not having anything in place.

3. Get a buy-sell agreement. Buy-sell agreements are another way to protect your business. Besides protecting your business from situations where your partner dies or when the business is sold, it also protects you in the event of divorce. A good tax lawyer or lawyer well-versed in contract and business law can draft this type of agreement.

4. Make sure your spouse is not working for you or with you. The more involved the spouse, the more he or she is going to want a piece of the business.

5. Pay yourself a salary so that you’re getting a draw from the business instead of reinvesting into the business. If you fail to pay yourself but instead put the surplus back into the business, your ex is going to want a healthy chunk of that business.

6. Keep personal and business expenses separate so the business remains your separate property.

7. Put the business in a trust to remove it as a marital asset.

Keeping the business going

What about the spouse who wanted to sabotage the business? If these strategies have been used, the business will still keep going and will help pay child and spousal support. Your ex is not going to want to tamper with it in that event.

These strategies require some advance preparation and some thought. If you have any doubt as to what you should do, consult either a business or family law attorney to protect your business and your peace of mind.