Everyone knows that a divorce can wreak havoc with one’s personal finances. For business owners, a divorce also has the potential to do serious damage to their company’s bottom line — and its long-term future.
In this blog post, we’ll discuss why that is, and what you can do to protect your business.
Marital property
When a married couple divorces in New York, they must divide their marital property according to New York law. Generally speaking, marital property consists of any assets or debts the spouses acquired during the marriage, while assets and debts acquired before the marriage remain as separate property.
If the spouses acquired a business during the marriage, then the business may be entirely marital property. However, even if one of the spouses owned the property prior to the marriage, the business may be considered partially marital property. For instance, if the business gained value during the marriage, that added value is likely subject to property division in divorce.
Dividing a business in divorce
If a business is fully or partially subject to property division in divorce, the three most common ways of handling the division are:
- Sell the business and divide the proceeds.
- Continue to run the business as partners.
- One spouse keeps the business and buys out the other’s share.
Any one of these options can be enormously disruptive to the business. The third option is fairly common among divorcing couples who own a business, but it can be enormously complicated. It requires first hiring professionals to determine the value of the business, then coming up with a way to finance paying for one spouse’s share. This can create serious risks for both one’s personal finances and those of the business.
Protecting your business
The best way to protect a business from property division in a divorce is to act before the marriage even begins. A prenuptial agreement can specify that the business will be treated as separate property in the event of a divorce. It can also dictate terms for dividing any added value the business accrued during the marriage. For instance, a prenuptial agreement might specify that, in the event of divorce, the other spouse can receive 5% of the value added to the business during the marriage. This percentage may be lower than what the spouse would have received without the agreement.
A post-nuptial agreement, which is signed during the marriage, can achieve most of the same ends.
Outside of prenuptial and post-nuptial contracts, there are other important ways to protect a business from divorce. Depending on the business format, it may be possible to specify in organizational documents that ownership in the business cannot be transferred as part of a divorce.
Some other methods can fall under best practices guide for running a business. One is to simply keep the business’ finances as separate from personal expenses as possible, and to keep good records of all cash transactions. A related matter involves pay. Business owners who pay themselves should keep their compensation to the level of market rates. They should do the same if their spouse works for the company.