Divorce, when a business is involved, may put you in an even more unpleasant situation. If you divorce in a community property state, you may be required to give up half of your business or an equal amount in an equitable distribution state.
Consider Your Spouse’s Involvement in Your Business
As previously stated, the court will almost certainly designate your marital business property in whole or in part. Your spouse might be entitled to a sizable portion of your company if they worked for you or your organization, assisted in its administration, or even came up with business ideas throughout the marriage. The higher your spouse’s engagement in your business, the more significant the percentage. If you had partners, you and your spouse would each have an ownership share in the company.
Separate vs. Marital Property
If you and your spouse are in divorce when a business is involved process, it is vital to understand the difference between separate and marital property. When your property is detached, it may lose its status if it is joined or commingled with marital property or vice versa. Separate property includes deferred compensation, stock options, bonuses, country club memberships, annuities, and life insurance (especially those with cash values).
Using Buy-Sell Agreements to ‘Lock-out’ Your Spouse or an LLC, Shareholder, Partnership
You should include several provisions in the partnership, shareholder, or operating agreements to protect the other owners’ interests in the event of a divorce. This includes a requirement that unmarried shareholders provide the company with a prenuptial agreement before marriage, along with a waiver of the owner’s future interest in the business by the owner’s spouse-to-be. Shareholders or partners have the right, but not the duty, to buy the shares or interests of one or both divorcees to maintain control of their business. This is what a “buyout clause” is.
Prenuptial and Postnuptial Agreements
A prenuptial agreement (or prenup) is a contract signed by the spouses before their wedding that details the parties’ rights and expectations in divorce. As long as a prenuptial agreement is correctly constructed, it can “supersede” statutory community property and equitable distribution regulations. The sole distinction between a prenuptial agreement and a postnuptial agreement is that a postnuptial agreement is written and entered into after the wedding.
Prenuptial agreements are comparable to commercial contracts in that neither party has legal family law rights against the other party before marriage. Married spouses have well-defined legal rights regarding support and property division, and they are said to be in a fiduciary relationship. As a consequence, the courts will be suspicious of their dealings.
How to “Pay-off” Your Spouse
If you failed to protect your business adequately and your spouse now has a claim to an ownership share, you have numerous choices for resolving the situation. Participate in marital assets other than cash, stocks, and real estate, as well as retirement savings. To divide the proceeds from the sale, sell the business. While this is one of the least ideal techniques, it is not uncommon. There may be no other way to repay the other spouse.
Pay Yourself a Competitive Salary
Not having a competitive salary is a relatively frequent omission. For instance, not paying yourself a competitive salary but instead reinvesting everything back into the business, means your soon-to-be ex-spouse may claim that they are entitled to more money or a more significant stake in the company.
Valuing a Business During a Divorce
The process of valuing a business is more complicated than it first seems. To estimate the worth of a company, one must consider the following:
- Tangible property (assets)
- Intangible property
Liabilities are equally as important as tangible assets for determining the value of a business. It’s all about how current and prospective customers and the wider public see the company. Expect a thorough examination of your company’s financial records from the team in charge of the organization’s appraisal.
Get A Lawyer
In a divorce settlement, a divorce with a business involved would examine various factors, including the kind of industry and company in which you are involved, your spouse’s role in the business, and the date on which you acquired particular assets. When it comes to business disputes, regardless of whether you are a common-law partnership, a single individual, or married and never divorced, you will need to retain the services of an attorney.