Making sense of divorce is a serious undertaking. It’s a complicated situation. There is a lot to understand and work through with your ex, your lawyer, and your family. In the divorce process, one area you can’t afford to neglect is in your business.
Business owners face an additional set of concerns when they split from their spouse. Depending on the status of your business and your spouse’s level of involvement, both in time and money, you may have to give up part of your business, its current value, or a share in the company when you divorce. Other times, some owners must sell their entire company.
It’s important, when you’re heading down this road, to discuss everything in detail with your divorce lawyer and familiarize yourself with concepts like community property laws and separate property, marital assets, couples also existing as business partners, prenuptial agreements and postnuptial agreements, division of property, shareholder agreements, business valuation, business ownership and business partnership, buy-sell agreements, business assets, equitable distribution, and more.
Thankfully, you don’t need to master these ideas, since your divorce attorney will be able to walk you through the entire process. Still, you’ll want to have a clear understanding of how to set yourself up right to keep your business secure. This isn’t something you should look at only when divorce rolls around, but for your own protection, when you’re first getting married.
It’s not about being suspicious and paranoid about the possibility of divorce or the loss of assets and control. It’s about establishing a foundation of transparency, trust, legal and financial protections, and a clear business structure, along with keeping detailed financial records, separate but equally organized personal finances, maintaining compliance, and pursuing efficient business operations and business finances.
This also includes putting trusting legal representation in place, arranging things so very little is left to chance and the owner and children continue to benefit from the family business. Let’s look closer now at some of the most important questions and answers involved in figuring out what happens to your business during divorce.
How Will Divorce Affect My Business and My Work?
Separation and divorce impact your professional life a lot more than you might think. The most obvious is that you may lose a share of your company, have to pay out 50% of its value, or give up a certain level of control in your business to your ex, depending on your status and access to funds.
This problem carries clear downsides, as the loss of assets or control can negatively affect not only you personally, but your long-term company strategy, your hopes for expansion, your customer and partner relationships, and your public perception in the market.
A change in income may put a strain on your kids, their schooling, quality of life, or future inheritance. Also, if your spouse is still involved in the business, the conflict and strain between you two can compromise not only certain business decisions and company morale, but create more conflict within your family, in the end, causing emotional distress for your kids.
Often, business owners work years to get where they are, sacrificing so much of life to achieve their dreams. Losing a large portion of the fruit of these accomplishments can be devastating or set you back several years. The key is to go in educated and with open eyes and do what you can to draft clear expectations and agreements in case divorce becomes a reality.
Understanding Community Property and Equitable Distribution
Currently, 41 out of 50 states are considered equitable distribution states. This means that the final decision regarding the fair distribution of property, including the business, is made by the court. This can sometimes be a very long, complicated, nuanced, and conflict-ridden affair, especially when spouses refuse to come to a consensus about property ownership and company control.
In the remaining 9 states, including Washington State, the concept of community property is in play. This generally means everything is split 50/50. Of course there are exceptions and additional considerations.
The courts, taking information from official documents and from the testimonies of each spouse and your individual attorneys, must first establish ownership of the business. Did one individual start and own the entire business prior to getting married? Did they continue to operate it solely without help, both in work or finances, from their spouse? How much did the business grow during the marriage and is any of this growth now community property? Did the non-owner spouse do regular work for the business? Were there other loans or investments paid into the company during the marriage that change the level of ownership in any way? Is the business privately or publicly owned and who is the majority shareholder?
The Complexities of Stakeholders
If your spouse is awarded a sizable payout from the court’s decision based on the company’s ownership status and valuation, whether it be in stock, revenue, physical assets, or decision-making power, it could put your company at risk. This is especially true when your ex doesn’t hold the same passions, goals, values, or strategies as you do for the future of the company and its employees. They could really throw a wrench in what you’re trying to accomplish.
The best outcome in this case is often for you to buy out their company stake. You can pay a flat sum and simply purchase their portion of the business. You can also give them more stock and let them sell it. Though, this will sometimes negatively affect your share price. Once you’ve completed the process, they will no longer possess any ownership in the company and can no longer pose a threat. There are certainly other solutions, and we will discuss these further down in the article.
One unfortunate caveat to this is when our ex is spiteful and just wants to hurt you. They can try to make false and damaging statements online or to others in-person about the quality of your goods and services, your customer service, your personal and professional behavior, and your operations.
These lies can be incredibly damaging. However, they can also get your spouse in deep trouble if their printed statements are deemed libelous (false and damaging with intent) by a judge, and of course, if you can prove it was your ex who wrote them. This can lead to significant fines, financial settlements, and other penalties.
Also, it is usually unwise to dirty your ex’s business reputation or standing, since their continued success often means regular child and spousal support payments. If their business suffers, so do you.
Will I Have to Sell?
If all other possibilities have been exhausted, the judge does have the ability to order the sale/liquidation of the business to accommodate the division of property. This is rare, however, since there is often so much riding on the continuity of the business.
The revenue produced is often the primary source of income, not just for the owner, but for the family. Keeping the business intact means a continued source of provision for the kids of the divorce, for the primary owner, and for the children’s future.
Solutions for Protecting Your Business
It is vital that you do what you can early on, even before the wedding date, to draw up plans for the company, to establish ownership, titles, and any relevant stipulations regarding its management. You can protect yourself from certain unknowns that may come later, and, to some degree, take actions later on if you’d neglected to do so before the marriage began. These may not solve everything, and they won’t guarantee things will go exactly your way, but executing a plan is always better than simply leaving things to chance.
With this in mind, let’s go through some examples of common solutions for protecting your business during divorce.
Get a Prenuptial Agreement
A prenup may not save your business, but there is a pretty good chance it will. In a prenuptial agreement, you will designate future businesses or already active businesses as separate property. You must be transparent and disclose everything to your spouse.
The agreement must be signed in the presence of witnesses or a notary. Signing has to be voluntary, without threat or coercion. It also must not be done a few days before the wedding. If it was, the court may deem the agreement null and void. Be sure to follow all official rules and timetables for a legitimate prenup, and protect the future of your business.
Obtain a Buy-Sell Agreement
A buy-sell agreement is a life insurance agreement/contract designed to protect your business in instances where your business partner dies, the company is sold, or in the case of divorce. The added protections, both financial and legal, can help business owners avoid certain conflicts or loss of interest during these times.
It is imperative that you work with an experienced tax attorney or other similar attorney when drafting the agreement and to ensure you completely understand how the contract works.
Get a Postnuptial Agreement
Postnups are similar to prenups, but instead of before, they are created after the marriage begins. Courts tend to scrutinize postnuptial agreements closely since spouses are essentially signing power, property and rights, away. These contracts don’t work every time, but it is better to have one than go without protections.
Pay Yourself a Salary…and a Good One
Pay yourself a larger, regular salary instead of taking a small salary and reinvesting even more back into the business. The more funds that go back into the business, the more there is to be compromised later during a divorce.
Avoid Having Your Spouse Work with or for You
If your spouse works for the business, they may be awarded a greater share of it down the road. The more they contribute, the more they are entitled to.
Put the Business in a Trust
If you put the business in a carefully designed irrevocable trust, you may be able to protect it from being divided in a divorce. When you do this, you actually give up ownership of the company. You place these assets in trust for your beneficiaries.
It is important to remember that these kinds of trusts can sometimes be rendered null and void and essentially useless. When trusts are created late in the game, the courts can toss them out. This happens when a business owner quickly creates a trust when they begin to suspect a divorce is on the way, or when they feel they’d like to leave their spouse. If the court believes the trust was not created in good faith and was an attempt to fraudulently transfer assets to keep them from a spouse, they can rule against it.
What if I’ve Waited Too Long?
If you didn’t take steps earlier on and now find you and your business in a difficult position during divorce, there are things you can do to help your situation. Some of these include the following.
Sell the Business
Of course, this is a last resort solution. But when all else fails, sometimes individuals must sell their business to meet their obligations in the divorce settlement. This can be disheartening and mean giving up a great deal of what you’ve worked for. However, it can also mean avoiding years of having to work with your ex, arguments over profit percentages, compromises to the business, and other difficulties.
You may be able to take some of your cash and move on to bigger and better ideas, create something new. It will be up to you, what you decide to prioritize, and what your goals for the future might be. Thankfully, other solutions are often available. A handful of these are listed below.
Make Payments Over Time
If your ex is willing to agree to it in writing and the court approves, you can make payments over time from the profits of your business or from wage garnishments. This will keep your finances and business more secure in the meantime and allow you to maintain consistency in your and your child’s quality of life. It will also enable you to protect your professional goals and the long-term strategies of your business.
Sell Some Assets
If you need to pay off your ex, consider selling off some physical assets, especially when there is a surplus (more than you need in certain areas). This can be production and manufacturing equipment, company vehicles, office furniture, unused facilities, and much more.
You may not always have enough of a surplus, so losing a few more important items may be necessary. Just don’t get rid of things that immediately harm your production or services. You don’t want to save yourself hassle now and then have it affect your customer relations or revenue.
Sell a Stake/Portion of Your Business
Instead of selling the entire business, consider selling stakes of it to current or new partners, or employees. You can sometimes even negotiate a buy-back agreement for a later time. This will give them the benefits of company profits in the meantime and a favorable sell price later on. This provides you with immediate cash to meet your obligations to your ex.
Take Out Additional Loans
Another way to gain access to cash is to take out an additional loan. You could possibly borrow using your business, projected revenue, or physical assets to cover the loan as collateral. Additionally, you may be able to borrow from the equity in your commercial property.
As you can see, there is much to consider when trying to grasp the complex intersection where divorce and business cross paths. This relationship between the two often creates greater stress, more complex problems, prolonged conflict, and the need for a lot of good, professional advice.
In any case, you need to partner with qualified attorneys, both divorce and family lawyers for all divorce matters, along with any tax, property, or corporate attorneys needed for business arrangements. It’s best to prepare in advance with written, signed documents that spell out as much as possible.
This doesn’t guarantee it will all go your way, especially if your spouse becomes more involved in the business after you get married, or had made shared contributions from your marital property/community property. But the more preparation you do, and the more support you have from excellent attorneys, the better off you and your business will be.
Torrone Law provides individuals and families the resolution and peace of mind they need during complex family legal cases, including divorce, adoption, and custody cases. Connect with us today to get your questions answered and schedule a consultation to get started on protecting your future.
To learn more about divorce and business, check out our frequently asked questions below.
What are some common struggles business owners face during divorce?
Business owners often have to navigate a great deal during divorce. Along with their attorneys and their ex’s lawyers, they’ll need to come to an agreement about the division of property, which may include part or up to half of the business. There may be concerns about company governance and management if one’s ex was involved in the business.
Other questions arise when a spouse made additional investments in the company using community property or if they worked for the business. A business owner might worry that if their spouse stays involved, they may lose a level of control over the direction of the company. Also, they might stress over available assets, their public image, their income and quality of life for their kids, and much more.
What are some things I can do if I don’t want to sell my entire company to meet my financial obligations to my ex?
If you want to avoid having to sell, there are other options. These include:
- Taking out loans
- Selling a portion of assets
- Selling stakes, or portions, of the company to current or future partners, and employees
- Making payments over time
- and other solutions and arrangements you or your lawyers may think of
How is the fair market value of my company determined?
There are often several factors that go into such valuations. You will need professional business appraisers, lawyers, and accountants to perform a detailed and accurate appraisal of your company’s value.
Where should I go for accurate information about protecting my business during divorce?
Your first line of defense and best advocates are going to be your lawyers. They have the knowledge, experience, and understanding to navigate these waters with you and help you come out safely.
Additional sources include books on the subject, websites and blogs, government pages dedicated to the subject, and other business owners who’ve walked through the same thing.