If your a small business owner, odds are good that your business is you and your spouses most important (and most valuable) asset. You’ve probably invested countless hours and tons of resources, and like any big asset, you want it keep it protected. Even if you are only a partner or partial owner of a business, or you’ve just invested in it, those assets can come into play during a divorce.
If you’re reading this, you’re probably planning to get divorced,or you’ve already started the process. Aside from the financial and emotional toll, divorce can have a big impact on a business if it’s included in a settlement, and the process can make it difficult for owners to focus on running their business because they’re distracted by personal turmoil, emotional stress and meetings and negotiations.
Despite the fact that divorce is very common, many small business owners are unprepared for divorce. This article will provide you an overview of ways to protect your small business and tips on what to do in the unfortunate event of a divorce.
Don’t Wait Until It’s Too Late
The importance of protecting your small business before initiating (or even considering) divorce cannot be overstated. Ideally, protective measures should be in place well before marriage. Once divorce is on the table, if your business isn’t protected, unfortunately it’s probably on the table, too.
While it can be an awkward discussion, it’s crucial to protect your business, interests, and investments before tying the knot. After all, you’ve put in the work to start and grow your own business, so put in the work to protect it.
Making the discussion about anything but you and your spouse or fiancé (like your business, employees, kids, investors, or other people/entities that could be affected by a divorce) is a good way to raise the topic.
Hire a Lawyer
The diversity of business owners, relationships, state laws, and business types make every divorce a unique case. The more factors in play, the more complex it will be.
State laws vary, and there are several factors that will be taken into account during a divorce settlement. These include the industry and business type, the business’ formal/legal structure, your partner or spouse’s role in the company, when specific assets were acquired, and children, among many others.
If you’re not sure where to start, give our albuqerque divorce lawyers a call at 505-317-4455 and we can provide you a case evaluation and either help you with your legal problem or refer you to someone who can help you.
The most common way to protect your business is a prenuptial agreement (prenup).
A prenup is a binding contract signed by each partner before their wedding outlining what happens to all assets, property, and income in the event of divorce, separation, or death. It’s the fastest, easiest, and least expensive way to protect your small business in the event of a divorce. When one or both partners is a small business owner (together or with different businesses), the complexity is multiplied, so a prenup is strongly advised.
With many New Mexicans waiting longer to get married than previous generations did, they tend to have more assets and property they’d like to protect when they do decide to tie the knot. Some couples opt for a prenup simply to prevent the courts from making decisions about their important assets if their marriage ends.
Prenups must be written, free of coercion, and include full disclosure (no hiding assets). Violating any of these conditions will invalidate the prenup. It’s recommended that each spouse have an attorney represent them for the process, as it can be complicated. Each party having an attorney also increases the legitimacy of the document.
It's important to note that in New Mexico, Prenups and Postnups cannot control alimony, child support or child custody. That must still be litigated at the time of divorce.
A frank discussion and some formal planning before marriage might save you (and your business) an incredible amount of financial hardship and frustration. Determining at the outset which property will be separate, and which will be marital (more on this below), is the safest way to go.
If you don’t have a prenup, a postnuptial agreement (postnup) could still be an option. They contain the same vital information about assets and property, but they’re signed after marriage.
Because they come after, they’re not as strong as a prenup they also tend to be more thoroughly scrutinized by judges.
Postnups are often used as updates to existing prenups. As your financial situation evolves with family, business(es), inheritance, wealth, or any other factors, a postnup is a great way to mutually determine how income, debts, assets, and any property will be divided in the future.
A postnup can also outline that if there’s a divorce, a spouse is entitled to a set amount of money or a portion of assets before a certain date, which could help you protect future income and assets you might acquire through your small business.
There are several other ways to protect your business, but they must be in place well in advance of a divorce (or marriage).
One option to reduce the impact of a divorce on your business is to pay yourself a competitive salary. In the event of a divorce, if you didn’t take a salary and invested everything back into your business, your spouse could claim that little or none of your income went into the household.
Using a shareholder, partnership, LLC, or a buy/sell agreement can also be a great protective measure. These business structures and agreements can include provisions that protect the interests of the other business owner(s) if one gets divorced.
For example, your agreement can require that unmarried shareholders provide the business with a prenup before marriage, plus a waiver from the fiancé that removes them from any future interest in the business.
You can also forbid the transfer of shares without approval from any other partners or shareholders, or agree that they have the right to purchase the shares or interest of one or both of the divorcing parties so that the other owners(s) maintain control.
If you don't have a prenup or postnup or any other agreement and your going through a divorce, there are essentially three options. You can either (1) buy out your spouse to retain ownership of the business, (2) you can sell the business and divide the profits or (3) you can remain co-owners.
Understand Separate and Marital Property
When protecting assets like your small business, an important distinction to understand is the difference between separate and marital property
Generally separate property includes property owned before the marriage, inheritance received by one spouse only, and gifts received by one spouse only (from a third party).
Separate property, like a small business owned before the wedding, can very easily become marital property if not carefully protected and strictly managed. Once property is mixed—like income in a joint bank account, or something titled in each spouse’s name—it will almost certainly be considered marital property.
Any and all other property, income, and assets acquired during the marriage by either spouse will be considered marital property. This includes everything from bank accounts and retirement plans, to stock options, bonuses, commissions, mutual funds, bonds, businesses, professional practices and licenses, real estate, limited partnerships, vehicles, and even tax refunds.
Sometimes, if separately owned property rises in value over the course of the marriage, the increase can also be considered marital property.
If possible, you can privately reach a divorce settlement directly with your spouse, which allows you to avoid state laws. There are also “no fault” divorces, which allow couples to amicably end marriages without any allegations or blame. Most divorces conclude with a negotiated settlement and avoid going to trial.
Marriage contracts fall under state law, so in the event you move to a different state, update any agreement accordingly.
Genus Law’s motto is “Protect Your Success” because we specialize in helping clients who have a lot to be proud of. If you need help or have questions, call our Albuquerque divorce and custody attorneys today at 505-317-4455 or fill out the contact form on this website