Divorce-Proofing your Business

Divorce-Proofing your Business

It never hurts to be prepared. While it may seem cynical to some to be making preparations for a divorce, if you’re an entrepreneur, it’s crucial to protect your business interests in case it happens. ;

When Is a Company Part of a Divorce Settlement?

During a divorce, assets are divided, using either rules set down by the law, or with pre-nuptial agreements. In many cases this can be simple enough– if it’s a joint bank account, the assets are divided equally among the spouses based on the balance when the divorce is official. For property, it’s based on the value. But can a business be treated the same way?

It depends on the acquisition of the business. The law recognizes assets as separate and marital property. Separate property is a property that was owned, given to, or inherited by one spouse before the marriage, and is not part of the assets divided among the spouses. A company counts as marital property if:

  • it was acquired during the marriage, and
  • it was paid for by joint funds

In these cases, these can be divided by the court based on the company’s valuation.

Here are some things that you can do at different points of the marriage to protect your business:

Get a Pre-nuptial Agreement

Although discussing prenups might be an uncomfortable conversation before getting married, it’s crucial, especially when assets like property or stake in a company is involved. A prenup acts as insurance for your finances and businesses, in case of divorce or separation. However, if you are married or handling a divorce settlement, it might not be too late to create a financial contract.

Pre-nups are also becoming more commonplace, especially among millennials. In a report by Business Insider, millennials are signing more pre-nups because they are getting married later in life, and at that point will have amassed more assets than earlier generations when they got married.


Separate your business and family accounts

It’s prudent to always separate your family and business accounts. Integrated business and family accounts blur the lines between joint finances and company finances, which not only get messy during a divorce but makes financial planning for your company also more difficult.

Registering your venture as a sole proprietorship may leave it susceptible to future issues. Regardless of how much or how little their involvement in the company is, the ex-spouse is eligible for a part of the company, usually 50%. The best way to de-couple your company from your family’s finances is to incorporate. It may be more complicated than other forms of company ownership, but doing so affords the most protection for the company.

Make it Part of your Company’s Articles

Operating, shareholder or partnership agreements should include clauses that clearly set the other owner’s interest (if any) in case one owner becomes divorced.

In a corporation, the other business proprietors are more likely to remain in control of the firm by prohibiting share transfers without the other shareholders’ approval. They can also establish their mandate to buy the shares of divorcing entities.

Sacrifice other assets

If you’re already in the midst of divorce proceedings, it will be down to how you negotiate with your spouse. When discussing who is entitled to what amid a divorce, your business may be among the assets to be shared. If you don’t want to split or lose your company, you can give up other assets amid the divorce rather than surrendering your company assets.

In less contentious cases, the spouses can get a professional to do divorce mediation and facilitate the negotiation. In other cases, divorce lawyers can advocate for their respective clients’ interests. Obviously, this is the hardest option to take, so avoid having it get to this point by dong everything else above first.

While divorce can be difficult, it can be made even more so if your company is also involved. So protect yourself–there are many ways to go about it, and protecting your company is always a smart play.

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