Divorce is a challenging and emotionally draining experience.
The stakes are even greater if you run your own company. Your hard-earned business could be on the line in a divorce. If you are prepared and well-protected, you can easily retain a part, if not all, of your company.
This can be devastating, financially and psychologically. But there are things you can do to protect your business interests in case of divorce.
Here are some practical steps to protect your business during and after divorce.
1. Have a Prenuptial or Postnuptial Agreement
A prenup is an agreement between two brides-to-be in which assets, such as a business and any other business, are jointly divided if they divorce.
In a prenup, you can specify that the business assets are separate property you own fully, not marital property subject to division. It circumvents many automatic divorce provisions, giving your spouse an ownership interest in the company.
But what if you didn’t draw up a prenup on the wedding day? You’re not too late, anyway. Also, after you get married, you can develop a postnuptial agreement. The kind of contract you will get is the same as the prenup.
Prenups and postnups are embarrassing topics to discuss in relationships. Others find these contracts unromantic. However, they clarify and equalize things for both partners when they become separated, in the worst case. "One prevention is one treatment."
A leakproof prenup or postnup that separates your business into separate properties protects you well. Take the time to consult an experienced attorney to prepare an agreement that covers all your business interests as required by the laws of your home jurisdiction.
2. Maintain Clear Separation Between Business and Personal Finances
Mixing personal and company money is people's number one mistake regarding entrepreneurship. When business and personal funds mix, it is much less likely that your spouse can prove that the marital assets went to the company.
It would help to separate your personal and business finances to protect your business. And some key things to do:
- Separate bank accounts for your own and your business money. Don’t mix the two.
- Be sure to have exceptional credit cards just for business purchases. Don’t pay with personal cards.
- Maintain separate books of accounting for personal and commercial accounts.
- Don’t have your wife listed on business bank accounts or company documents if they’re not the active owner.
- Don’t pay the business with joint marital property, such as your home equity.
- Don’t move your own money into business accounts or vice versa.
When you separate your financial lives from each other, you always distinguish your business and its funds from the marital home. So, it doesn’t allow you to be part of any divorce settlement.
3. Pay Yourself a Fair Salary
As a small business owner, you typically earn an hourly rate and save some income in the company to pay for expansion.
But slush money can turn into a burden during a divorce.
The courts can treat held business income not distributed to you as your income in the context of the business's overall value, suggesting a family law lawyer. That might mean you can take more of the business your spouse is entitled to.
In the meantime, if you make a market-rate wage, your extra profit stays invested in the company. By accepting a decent salary from the company, you have income for your life, and the company earnings remain separate.
Ask your accountant to help determine an appropriate salary given your position, experience, geographical location, and competitive salary. It reduces what your spouse can accuse you of.
4. Offering Buyout
Sometimes, the court will award your spouse some of your business value. If so, there are a couple of tricks you can use to stay in control:
You can pay your spouse cash upfront to purchase the business on their behalf. That might involve getting a business loan.
- Paying overtime—If you can’t afford a one-time giant check, you could work out an installment arrangement to pay off your ex over time.
- Transfer of in-kind property - Sometimes, you can offer other tangible assets, such as real estate or investments, to pay off the claim against your business.
However, the buyout model is structured to leave your business 100% yours. You give your ex their rightful share of assets, but you don’t have to give them a foothold in your company.
5. Get an Accurate Business Analysis.
To protect yourself from divorce, you must receive an expert's accurate, independent estimate of your business.
The valuation includes your business’s sales, profit, assets, liabilities, market value, and earning potential. Please don’t give the business its value by any chance of an inadvertent calculation.
Disclaimer:
The content provided on this blog is for general informational purposes only and is not intended to constitute legal advice. Laws and regulations are complex, frequently subject to change, and may vary depending on jurisdiction. As such, readers should not act upon or rely on any information presented on this blog without first consulting with a qualified and licensed attorney who can address and tailor guidance to your unique legal circumstances.
