If you own a business, there’s a good chance you’ve spent a considerable amount of time and money growing it over the years. Entrepreneurs are known for making substantial sacrifices in order to build their companies. Years of sleepless nights and fiscal belt-tightening are expected to yield an asset they can sell or pass down to their kids.
Unfortunately, many entrepreneurs are unaware that if they get divorced, their spouses might end owning up to half of their companies. Such are the laws surrounding divorce and the distribution of marital assets in most states. With more than half of first marriages imploding, this is a real concern for business owners.
Below, we’ll describe several ways you can protect your company in a divorce. Keep in mind that most of the following measures need to be in place long before you or your spouse decides to call it quits.
Create A Postnuptial Agreement
Ideally, you had your spouse sign a prenuptial agreement prior to tying the knot. If you neglected to do so or started your business after getting married, there’s still hope. Consider creating a postnuptial agreement.
It’s essentially the same as a prenup. The only difference is that the agreement is signed after you and your spouse are married. It should specify what happens to your company in the event you and your spouse decide to divorce.
Not all states give credence to postnuptial agreements. In some states, they’re worth little more than the paper they’re written on. Other states recognize them, but routinely dismiss them based on circumstances in the marriage. Having said that, given the choice of having one in place and having no protection at all, creating a postnup is a good idea.
Put Your Company Into A Trust
Another valuable tool for protecting your business is a domestic asset protection trust. The trust is a legal entity that shields any assets, including your company, that are placed into it. Creditors and spouses are thus unable to gain access to the assets.
Several states, including Delaware and Nevada, are popular jurisdictions for creating such trusts. It’s worth noting, however, that the laws surrounding their creation are complex. There are many nuances and restrictions that govern how they can be used and the types of assets they can hold. If you’re thinking about using a domestic asset protection trust to shield your company, it’s advisable to consult an estate planning attorney.
Give Yourself A Generous Salary
Entrepreneurs have a tendency to put all of their money back into their companies. Every small profit is reinvested for future growth. While this is a sound strategy from a business perspective, it can inadvertently expose the entrepreneur’s business to ownership issues in a divorce.
The soon-to-be ex-spouse of a business owner can argue that she should have benefited from her partner’s business success. For example, she can assert that some of the profit generated by the company over the years should have been used to help pay for the couple’s monthly bills. A sympathetic judge might rule that the spouse deserves to receive part ownership of the company.
As a business owner, you can (hopefully) avoid this scenario by giving yourself a reasonably generous salary. Rather than investing all of your profit back into your business, pay yourself a salary that reflects the health of your company. Some of that money can then be used to pay for household expenses.
Keep Your Business And Marriage Separate
Unless you depend on your spouse’s expertise in a specific area of your business, it’s best not to involve him or her in its operation. For example, don’t hire your spouse as an employee. Don’t bring him or her on as a partner. The more time your spouse spends working on your company, the more compelling an argument he or she can make for owning a percentage of it.
If your spouse is currently your employee, take steps to end his or her employment. If he or she is your partner, you’ll likely need to buy out her interest in the business – either with cash or by giving up ownership of other marital assets.
Creating a divorce-proof shield around your company is possible. But it’s important to take steps long before you and your spouse decide to end your marriage. Consult an experienced divorce attorney regarding some of the strategies discussed above. If necessary, he or she can recommend other attorneys with expertise in asset protection and estate planning.