If you are an entrepreneur who owns a business and is married, then a divorce could complicate things tremendously if you’re trying to protect your business interests. Since more than 50% of all marriages in the United States end in divorce, this means that the odds are against you that your marriage is going to work out. As a businessperson, this could spell disaster because most spouses are entitled to 50% of their partner’s assets when a divorce takes place where no one is at fault. That is why you need to take certain actions right away so that your spouse does not end up taking possession of some or all interest in your business. This is especially important if you’re selling your business because the divorce could have an impact over how much money you receive versus how much your spouse receives. Below are 15 tips on how you can protect your business from ending up in the hands of your soon to be ex-spouse.
# 1 – Form a Buy-Sell Agreement
There are many reasons why a buy-sell agreement is important to make when buying a business. One reason has to do with defining the interest that your spouse will have in the business. There needs to be a clause somewhere in the agreement which prevents your spouse from obtaining any kind of ownership in the company in case there is a divorce. Another clause you could put in the agreement is the right to purchase any interest that was awarded to the spouse from a divorce proceeding. You could even define a preset price that your spouse has to sell it to you for after the divorce.
Video: Gary discusses a possible option to utilize while attempting a divorce with a business partner, otherwise known as a buy-sell agreement.
# 2 – Prenuptial Agreement
Many people think a prenuptial agreement is something that only millionaires and billionaires use when they get married. The truth is that anyone who cares about protecting their assets and business interests should use a prenuptial agreement prior to getting married, no matter how much those assets are worth. Even if your net worth is just a couple hundred thousand dollars, that money is still worth protecting with a prenuptial agreement. Sure, it may look as if you don’t trust your spouse when you ask them to sign it, but if they are trustworthy than they shouldn’t have a problem in the first place. That way, you can rest assured that your business interests will be totally protected in case the marriage doesn’t work out with your partner.
# 3 – Terminate Your Spouse’s Employment with the Company
If your spouse is actively employed in your business and has a big role in its success, you need to fire them right away from their position, assuming they don’t have ownership interests in the company. If your spouse has a prominent role in the business and they have been working in that role for a while, they will have a strong case against you in divorce court when they try to ask for ownership interests in the business as part of the settlement. The faster you put more distance between your spouse and your company, the better chance you’ll have of protecting your own business interests.
# 4 – Employee Stock Ownership
One way you could limit some of your ownership interests in the company is to create an employee stock ownership plan. This will end up giving your employees a minority ownership stake in your business. In exchange, you will get cash for selling your stock and it will mean there’s less ownership interests that your spouse can claim in a divorce proceeding. However, you shouldn’t have to sell all your interests in the business because you’ll still want to keep getting a monthly income from that business to pay your bills.
# 5 – Monthly Payments
If you are in a position where you didn’t protect yourself when you started your business and now you are divorcing your spouse, then you need to find a way to compromise with them. If they already have ownership interests in the company, offer to purchase their interests back from them with monthly payments. Chances are that they’re not going to want to bother running the company. They certainly don’t want to risk losing their interests if they company fails. So, if you offer them money every month in exchange for getting their ownership interests back, they are most likely going to take the deal.
# 6 – Postnuptial Agreement
If you have already gotten married but forget to have your spouse sign a prenuptial agreement, do not worry because you can still have them sign a postnuptial agreement. This is similar to a prenuptial agreement in that it protects your business interests from being transferred over to your spouse in the event of a divorce. The only difference is the postnuptial agreement gets signed after the marriage has already taken place. Obviously, this would have to be signed a long time before any divorce proceeding were to take place. Perhaps if you’re married and thinking about starting a new business, you could then have your spouse sign a postnuptial agreement which states that they’re not entitled to any interests in the business and that it is a separate entity from your marriage.
# 7 – Whole-life Insurance
A whole-life insurance policy is a form of cash-value life insurance which creates monetary reserves when you pay excess premiums each month. All the extra cash is placed into an accumulation account and can be taken out early. You can even sell the policy for cash rather than wait until your death for the beneficiary to collect money on it. In the case of a pending divorce, you could liquidate your whole-life insurance policy in order to purchase back the shares of your business which your spouse is about to receive through a divorce settlement.
# 8 – Business Trust
When you start to realize that your marriage is doomed, you need to place your business into a trust so that it will no longer count as a marital asset. Although this could diminish the growth of your company’s value, it will at least disassociate yourself from the company because you legally won’t own it anymore. This means your spouse won’t be able to take any ownership interests in the company away from you because you won’t have any interests in it.
# 9 – Give Assets to Spouse
A divorce proceeding usually involves splitting each spouse’s assets up and distributing them evenly between the two parties. This doesn’t necessarily mean 50% of each individual asset gets distributed. Instead, the total value of each spouse’s assets gets added up and then a percentage of that value gets distributed, whether it’s through one type of asset or multiple types of assets. In other words, you could give your spouse all your personal assets in exchange for retaining all ownership interests in your company. This means giving them the car, house, jewelry and so on. They’ll likely agree to this because they won’t want the hassle of running the business anyway.
# 10 – Do Not User Personal Money in Business
There is a good reason why commercial bank accounts exist in the first place. You will want to keep your personal funds and commercial funds separate from each other. If you do not, a divorce court may think your personal funds are business funds which means that the judge will be more inclined to giving your spouse a portion of the business interests. You have to be able to prove to the judge that you didn’t deprive your family of cash or assets in order to fund the expenses of your business. This is another reason why you’ll want to keep your company as separate from your personal expenses and family members as possible. Only pay for commercial expenses with money from a commercial bank account or credit card.
# 11 – Pay Yourself a Salary
Do not confuse this tip with the previous one about not using personal money in your business. While this is true, you can still pay yourself a personal salary from the money you make in your business. Technically, a business owner is still an employee of their own company and they are entitled to pay themselves a salary each year just like any other employee. This will come in beneficial to you in a divorce proceeding because you can tell the judge that your annual salary from the business helped contribute toward the personal expenses of your household. Furthermore, you could argue that you used this salary to help support your spouse and family. As a result, your spouse should not be entitled to a significant portion of the business because your salary has already benefited her immensely.
# 12 – A "Pay-Off" Settlement
Sometimes it is easier to just agree on a settlement with your spouse rather than have a judge forcibly decide on who gets what in a divorce proceeding. It is kind of like how the defendant in a lawsuit will agree to settle because they don’t want to run the risk of losing more of their money or assets from a court decision. You could do the same thing in this situation. Just make an offer to your spouse that doesn’t involve the business and see what they do. You could offer them money, real estate property, or whatever else you think they’ll be satisfied with. Since settlements are faster and easier, your spouse may just want to accept the settlement agreement in order to get paid quickly and move on.
# 13 – Stay Friendly
Just because you are getting a divorce from your spouse, it doesn’t mean you have to be at each other’s throats like two enemies. Try to stay nice and calm throughout the divorce proceedings and don’t say or do anything that could make your spouse upset. Sometimes it helps just to be kind and considerate because then your spouse won’t be so hellbent on trying to take more of your assets away from you, like your business assets. This is particularly important to do if you are at fault in the marriage breaking up and your spouse can prove something wrong that you did. Hopefully, you will have a spouse that is compassionate and forgiving. If you do not, then this tip may not work so well for you. It is at least worth a shot, though.
# 14 – Have a Partnership with Others
If you create a business with third-party partners, then it will make it more difficult for your spouse to claim ownership interests in the business. The only chance they’ll have in doing this is by trying to take away your share of the business interests, but that is a much more complicated task for them to undertake. If you form a partnership with an agreement which states that ownership interest cannot be transferred without authorization from all the partners, then your spouse may find it difficult to get your interests transferred to them. This also works well if you are forming an LLC or Corporation because those are treated as separate entities all together. Corporations, in particular, tend to have shareholders which tend to have more control over ownership issues.
# 15 – Prove Your Spouse is at Fault
There are many reasons why a divorce may take place between two people. If it’s just because of irreconcilable differences, then assets will be split up pretty evenly between you and your spouse. However, if you can prove that your spouse did something awful to warrant a divorce, like them cheating on you, then you may have grounds to protect more of your assets in a divorce proceeding. You have to be able to show the judge that your spouse did something wrong and then be able to prove what it was that they did wrong. This is why some people hire private investigators to take pictures of their spouses cheating on them and so on. Once a judge sees pictures like these, they won’t be so quick to give your business interests to your spouse.
This website does not provide legal advice and ExitAdviser is not a law firm. Consult a qualified lawyer if you need legal advice.