Divorce for Business Owners

Divorce is already a scary proposition for anyone. But, divorce for someone who owns a business sounds like a nightmare, right? Well, it doesn’t have to be. There are things that can be done by you and your experienced attorney to keep you and your business protected in a divorce case.

What are the key factors a business owner should consider in a divorce?

One of the most important factors that a business owner must consider in a divorce is when was the business acquired or incorporated. A general rule in a divorce is that any asset acquired during the marriage is presumed to be marital property. Thus, if a business owner incorporated a business during a divorce, the court will presume it to be marital unless one of the exceptions applies. The most common exception is when a business is inherited during a marriage; in that case, the business is non-marital and not subject to the divorce.

A second important factor is each spouse’s contribution toward the business during the marriage. For instance, if only one spouse started the business, developed the business and grew it during the marriage, that spouse would have a good argument that he or she should receive the majority of the value of the business in the divorce. However, if the second spouse was responsible for raising children while the first spouse was developing the business, the second spouse will have a good counterargument that the value of the business should be split more equally in a divorce.

In other words, the second spouse could effectively argue that the first spouse was able to devote so much time and effort to the business because the second spouse was maintaining the home and raising the children.

Can a pre-nuptial or post-nuptial agreement help?

Good news here: yes. In fact, most of the pre-nuptial agreements (commonly known as “prenups”) we negotiate here at the firm involve protecting businesses in the event of a divorce. As a refresher, a pre-nuptial agreement is a legally binding contract that spouses sign before a marriage that outlines what happens to property and debt in the event of a divorce. A post-nuptial agreement (“postnup”) is similar, except that it is signed during the marriage instead of before the marriage.

A typical situation for a prenup is that one person has a valuable business that he or she wants to protect during the marriage. The prenuptial agreement will specify what happens to that business in the event of divorce, such as clarifying that the spouse who started the business will be awarded 100% of the business. For a postnup, a common situation is that two spouses are having marital difficulties around finances, and instead of filing for divorce, the spouses will enter into a postnup to clarify how the business will be divided in the event of a divorce.

Another common postnup situation is that two spouses have filed for divorce and are months into the divorce process. However, instead of getting divorced, the spouses decide to stay married and enter a postnuptial agreement that results in the dismissal of the pending divorce case. This is a positive situation that preserves the marriage, while setting ground rules for what will happen in the event of a future divorce.

A prenup or postnup can also have provisions that change over time. For example, a prenup or postnup could state that if the parties stay married for at least five years, the second spouse will receive 25% of the first spouse’s business, and that percentage can increase for each year of marriage up to a full 50%. Additionally, a prenup or postnup can have a “sunset provision” that states that at a certain point, such as 20 years into the marriage, the prenup or postnup will expire.

For example, a prenup could state that the second spouse receives nothing from the first spouse until the parties have been married for 20 years. After 20 years, the prenup restriction sunsets, and all marital property is divided equally between the spouses. This type of provision incentivizes spouses to stay in the marriage and “earn” the division of property.

How can I organize my finances to prepare for a divorce?

We help clients protect their assets. One way to do this is to separate business accounts from personal accounts. For example, if there is currently a business credit card that is used for both personal and business expenses, you can get two separate cards so that you can segregate personal expenses on one card and business expenses on another card.

As another example, is all the accounts are joint, you could start separating the accounts so that the tracing of funds and expenses is easier.

How can businesses be divided in a divorce?

There are several ways to divide a business during a divorce, and here are three examples that illustrate the main ways a business can be divided.

Example 1: The first spouse owns 8% of a lucrative company, and the second spouse wants to “ride along” with the business versus getting bought out for her one-half interest of the 8%. The first spouse then held half of his interest in the company in what we call “constructive trust” for the second spouse, and the second spouse rode along with the rise and fall of the value of the company.

Example 2: The first spouse owns a company 100%, and the company is clearly marital with the second spouse receiving 50%. The parties got divorced, and we reserved the issue of the value of the company so that an independent business valuator could be appointed by the court to value the business for the purpose of the divorce. This allowed the parties to get divorced without the business valuation holding up the rest of the divorce process. Several months after the divorce finalized, the valuator completed the valuation, and the first spouse paid the second spouse a lump sum for the second spouse’s 50% value of the company.

Example 3: The first spouse had a company that he thought was marital, and the company was valued at $2 million. However, in reviewing the company documents, we determined that the first spouse had actually inherited the business from his uncle, which made the entire business non-marital. That means the court could not divide it during the divorce. Thus, we were able to negotiate a settlement where the first spouse paid the second spouse only a fraction of the value of the company (far less than 50%) as part of the divorce settlement. The reason for the payout was the contribution argument that was discussed above. In this case, the first spouse was able to contribute so much time and effort to the business because the second spouse was busy maintaining the home and raising the children.

How is the value of a company paid out during a divorce?

Fear not, a marital business does not have to be liquidated during a divorce. If there is an agreement that one spouse must pay a certain amount of money to the second spouse for the value of a marital business, the court will often allow that payment to be structured over time. Sometimes, this payment may occur over several years. We recently finalized a case where our client will pay out his ex-spouse over ten years. This structured settlement allows the business owner to finance the payments without having to liquidate the business.

How is this helpful for you?

Here at Merel Family Law, we take pride in protecting our clients and their assets from all angles. We’ve researched the case law and we’ve done the work. When it comes to your business and assets, you’re in excellent hands. If you have questions about anything I didn’t cover here, please don’t hesitate to reach out.