Divorces can create an uncertainty about the future, and this includes the future of your business. Your business is an asset, and in a divorce, assets may be split among partners. If you’re considering filing for divorce or are already in the process of a divorce, it’s important you understand how you can protect your business.
The best way to protect your business is through a prenuptial agreement (or “prenup”), which is created and signed before a couple is married. A prenup lets you identify your business as separate property rather than marital property.
Once you’re married, however, things become a bit more complicated — but you still have options. Below we detail some suggested steps you can take to help protect your business in a divorce.
The first step is to sign a postnuptial agreement with your partner. A postnuptial agreement (or “postnup”) is a contract signed by a married couple that fully discloses their assets, liabilities, and income. The document also outlines how you and your partner’s assets will be divided in the case of a divorce or legal separation, and defines how much spousal support will be paid if a divorce or legal separation occurs. Any dishonesty in the creation of this document will render the agreement void.
A postnup must also be written down — oral agreements won’t hold up — and notarized. It is also advised that each party seek out legal counsel to ensure their best interests are being met through the postnuptial agreement. Be sure to obtain your own lawyer. Using your spouse’s lawyer to review your postnup could be a conflict of interest.
Both postnups and prenups are valid in the state of California, but they need to meet some factors to be considered valid. To avoid an invalid prenup or postnup, make sure your agreement is fair and clear to both parties involved. Both parties enter into marriage willingly and then create a document that details the option to back out — so there’s less of a chance that the terms of a postnup will be unfair. In contrast, a prenup may have some factors that make it invalid: one partner signed it without full knowledge, was coerced into it, or didn’t have fair legal representation.
There is no guarantee that a postnup will be enforceable, but the below suggestions are some ways to make a fair and defined postnup agreement that identifies your business as a separate asset.
Ways to Solidify That Your Business Is Solely Your Property
1. Validate Your Spouse’s Involvement
If your spouse contributes to the business in any way, including offering advice or brainstorming ideas, it will be harder to prove that they aren’t entitled to a portion of the business. And if they are currently working for you, you’ll need to find a way to let them go if you want to be the sole owner.
The longer your spouse has been involved in the business, and the greater their role, the more they have contributed to its growth — and therefore should be entitled to some of the profits.
If you and your spouse are co-owners, it makes this process more complicated. In this instance, you’ll either have to continue working together — which may not be ideal — or hire a business appraiser to perform a valuation of the company. After the evaluation, you can suggest buying out your spouse’s half of the business.
If mutually agreed upon, you also have the option to sell the business and split the profit.
2. Pay Yourself a Good Salary
You should always pay yourself a good salary if you own or co-own a business. This is something that you should do from the start, and isn’t something that you can start doing if you are thinking about or are in the process of divorce.
If you avoided taking a decent salary to allow more money to be invested in your business, your spouse might be entitled to part of the business. It can be argued that they invested marital earnings into the company, and are therefore entitled to part of the business.
3. Keep Good Financial Records
You can protect your business by showing that it has been solely your responsibility and capital.
If you have borrowed family finances to pay for business expenses, then the court will determine that your spouse has a right to part of the business. But if things remain distinct and separate, it is more likely that the court will be in favor of you solely keeping your business.
4. Use Other Assets to Match the Value
You can offer other assets (such as stocks, vehicles, or house) to match the value of your spouse’s portion of the business and then buy out their portion instead of using cash. Offering assets over cash could be one way to protect your future income while still satisfying the demands of splitting assets in a divorce.
The Sooner You Seek Counsel, the Better
Divorce can be a complicated matter, and both you and your spouse will need a lawyer to navigate the best path moving forward. If you’re considering divorce and are wondering how your business will be affected, you should seek legal counsel from a lawyer at Father’s Rights Law Center. The sooner you take steps toward understanding the potential outcomes, the more knowledgeable you’ll be.