Entrepreneur’s Guide to Saving Your Business From Your Divorce
You know how to start and run a business. You know you need insurance to protect that business against all sorts of risks. But did you know that one of the greatest threats to your business is divorce? Find out what precautions you can take to protect your business if you should divorce.
I. Make sure your business is not a "marital asset"Assets accumulated during a marriage are considered "marital assets". If you started your business during your marriage, that business will generally be considered a "marital asset" even if your spouse does not own or work for the business. There are steps you can take to avoid your business being considered a marital asset in your divorce.
II. How can you avoid having your business be considered a marital asset?(1) By Agreement: Discuss this issue with your fiancee before your marriage (or your spouse after your marriage) and agree, in writing, that the business will not be considered a marital asset. The form and process of creating and executing this agreement is critical to its effectiveness and enforceability. You will need a lawyer to draft it and your fiancee/spouse will need a lawyer to review it. These agreements are generally created in the form of Prenuptial or Postnuptial Agreements. But there may be other options. And there may be a need for additional agreements such as a Buy-Sell Agreement and/or Shareholder Agreement.
(2) By Placing Your Business in Trust: Placing your business in a trust, e.g. a Domestic Asset Protection Trust, you may be able to remove the business from your marital estate. There are many considerations you need to weigh in determining whether this is the best course of action for you. You will need a lawyer to assist you with this decision.
III. Other steps you can take to limit the exposure of your business in divorce(1) Keep all money separate: Commingling of non-marital assets with marital assets can transform the non-marital assets into marital assets. It is critical to set up separate bank accounts for your business and ALWAYS use these accounts for all business transactions. This goes for expenses too.
(2) Don't employ your spouse: If your spouse is not a key contributor to your business, resist the temptation to put him or her on the payroll. This seemingly innocuous act can undo an Agreement to keep your business entirely non-marital.
(3) Don't underpay yourself: Entrepreneurs often underpay themselves. This can result in a higher valuation for the business that is not realistic and may leave you in the position of having to pay more than you can afford to buy out your spouse.
(4) Plan buy-out options: If you think you may be headed for a divorce, and you do not have an agreement with your spouse regarding the business, plan how you might raise the money needed to buy out your spouse, e.g. a credit line, other investors, potential loan sources, etc.