By Ian Reading

3 Ways to Protect Your Business from Divorce

  • Your company needs to live on to make you money. When you've put your heart and soul into a business, you need to do everything you can to protect your business when you get married. If your spouse has any part of the business's operations or even puts a halt on his or her career to raise the kids, he or she may have a stake in your business.

    Proper legal protection can help you maintain your stake in the business without losing a chunk of your shares to your spouse.

    1. Sacrifice Other Assets for the Business

    You'll need to depart from some of your assets when you separate from your spouse, and if you have a high asset divorce, this may mean having to let go out the house, vacation home, luxury vehicles or other high ticket items. I want to warn you against a big mistake that many people make: do not hide assets.

    If you hide assets, this will cause you to lose your credibility.

    The goal is to forfeit other assets in an attempt to retain 100% ownership of the business. Some of the assets you may need to let go of are:

    • Collectibles
    • Real estate
    • Retirement accounts
    • Automobiles

    When you opt to sacrifice other assets, it can lower the share of your business that your ex is eligible to receive. The reduction in business shares will equate to the amount of assets you sacrifice. If your business is valued at $1 million and your ex is eligible to receive a 50% share of the business, you may be able to forfeit $500,000 in assets rather than a 50% share of the business.

    2. Pay Share Payments Over Time

    If your ex agrees, you can decide to pay your ex's share of the business over time. For example, if you've received a fair valuation of the business (a must-do), you may find that your business is worth $5 million, with your ex entitled to a 20% share or $1 million of the business' value.

    You can agree to pay back your ex's interest in the business over time.

    Payments can come from the company's cash flow or from a loan that the business takes out. If you have the cash flow, your business may be able to pay for your partner's shares outright, allowing you to cut ties with your ex immediately.

    The goal is to make your ex whole while still maintaining full control over your share of the business.

    If you choose this route, you'll need to make sure the agreement is made in writing and that maintain records of all payments made.

    3. Prenup or Postnup Agreements

    If you choose to marry when you already have a business, you can sign a prenup, which allows you to claim your business as separate property that's owned only by you. There are also postnup agreements, which can follow the same rules as a prenup.

    But a postnup may be difficult to enforce if it was signed close to the separation.

    When these agreements are signed, they do allow a business owner some form of protection, but that doesn’t mean that your ex won't have a right to the business at all. If your ex helps finance the operations or plays an integral role in the business, it may be seen as marital property despite a prenup being in place.

    The agreement isn't ironclad.

    If you have the foresight to sign a prenuptial agreement, you'll need to take additional steps to protect your business in the event of a divorce:

    • Do not mix personal and business expenses
    • Do not allow your spouse to be part of the business
    • Do not allow your spouse to help finance the business

    But even if you follow all of these steps, there's a chance that the agreement will be overridden in court. A spouse that takes care of the kids and sacrifices their career so that their spouse's business can flourish may be granted compensation as a result.

    Another smart tactic is to create a buy-sell agreement, which defines what happens when ownership of the business changes. These agreements can help safeguard businesses and are recommended for partnerships or business entities with multiple owners. The agreement will limit the spouse's ability to gain voting rights and acquire ownership in the business.

    A lawyer will be able to help you navigate the waters of owning a business and ensure that you take the appropriate measures to avoid a costly divorce.

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