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Protecting Your Business in a Divorce

Yogi Patel - Tuesday, October 11, 2016

Approximately 50% of marriages do not end in a “happily ever after” and while the relationship is still civil, you should take steps to protect your business and prepare your finances in the case that your relationship ends in a divorce.

Equitable distribution is the process by which the court divides martial assets between spouses who are soon to be divorced. Generally, when you open a business before your marriage, the increase in value of your business during your marriage is considered marital asset and is subject to equitable distribution. If you opened a business during your marriage, the business is typically marital asset and subject to equitable distribution.

The key issues that arise are the valuation of the business and how much of the business your spouse is entitled to receive. The amount your spouse will receive is dependent on your circumstances. Even if your spouse had nothing to do with your business, the court will take into consideration numerous factors including how many children you have and who takes care of them. Your spouse may be the one who takes the children to school and attend all the student-teacher conferences so you could work extra hours at the office. The court will also consider who takes care of the home, does the grocery shopping, and ensures the bills are paid. Sometimes, marital responsibilities are distributed so that one partner could dedicate all their time to the business while the other takes care of essential home needs. Often times while a spouse runs the business and makes the big decisions, the other spouse supports the business through administrative work or financial contributions.

If your business existed before your marriage, the best course of action is to plan ahead with a prenuptial agreement. A prenuptial agreement is a contract between two people who are about to be married that addresses how assets owned and earned by each person will be distributed in the event of a divorce, whether alimony (maintenance support) will be required in the event of a divorce and how to calculate it, and how assets will be disposed of in the case of death.

If you’re already married, you can enter into a postnuptial agreement. This is a contract that addresses the same rights as the prenuptial agreement. However courts tend to view postnups less favorably. If a business was started during the marriage, the spouse that was not involved is less likely to want to exclude the business from equitable distribution.

You also have the option to place the business in a trust. Meaning you no longer personally own it, but the trust owns it. Generally, this will protect the value of the company and keep the business from being counted as a marital asset.

Dividing assets during a divorce becomes more complicated when there are numerous business partners involved or you are a shareholder of a corporation. Because a business is legally its own separate entity, the question is whether a court could compel your partners to hand over private business information for the purpose of valuation.

Several interests are at play such as the rights of the business entity, the rights of your business partners, and the rights of your spouse. It is a balancing act that will require legal strategies chosen by your attorney. To protect the interest of the business as a whole and the partners, the partnership or shareholder agreement should include a provision that would protect everyone’s rights in the event of a partner’s divorce. Specifically, the provision would appear in a buy-sell agreement between the partners and would address how each partners’ share of the company should be valued, and a requirement that partners either enter into a prenup before marriage or a postnup if already married and also include a waiver or limitation of the spouse’s interest in the business through a stock restriction agreement executed by the spouse.

It is essential to divorce-proof your business, whether you are about to get married or are already married. Because the valuation and distribution of a business depends on your personal situation, it is important to consult with an experienced attorney to ensure your business rights are protected.

This article was prepared with the assistance of Julie Lee, (J.D. Candidate, 2017, CUNY School of Law).

 

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