Protecting a Small Business from Divorce

No one expects to get divorced when they say “I do,” but the reality is that 40-50% of marriages end in divorce. Ending a marriage and uprooting your life can be painful and challenging, but for business owners, these effects are amplified. Suddenly, your livelihood and all that you’ve worked hard to build is in jeopardy.

Taking steps to protect your business from divorce can help prevent a potentially devastating financial blow in the future.

Sign a Prenuptial or Postnuptial Agreement

The simplest and one of the most effective solutions is not a popular one: prenuptial agreements.

If the business was established prior to the marriage, a prenuptial agreement can shield a business in case of divorce. Prenups are not always iron-clad, but if they’re well-drafted, they can often “override” Equitable Distribution and Community Property state laws. Courts will often respect these agreements, and they can be a powerful tool in protecting your business in a divorce.

Prenuptial agreements should meet the following requirements:

• It must be in writing.
• There must be a full disclosure of assets. Hiding assets is illegal in a divorce will invalidate the agreement. Both spouses must be fully aware of each other’s assets.
• The agreement must be executed voluntarily and without coercion. Don’t wait until the day before the wedding to have your future spouse sign the agreement.
• It must be executed by both parties and, preferably, in front of a witness. If you can, you may want to have a judge witness the signing of the agreement.
• The terms of the agreement must be reasonable. If the business is generating millions of dollars each year, don’t expect to give your spouse nothing in the divorce.

Prenuptial agreements are one of the most effective and least expensive ways to protect a business from a future divorce.

But if you’re already married and headed to divorce without a prenup, a postnuptial agreement may save you some frustration.

Postnuptial agreements are similar to prenups, with the exception that they are signed after the marriage and not prior. A postnup should contain all of the same elements of a prenup in order for it to be valid.

It’s important to note that a number of states still do not recognize postnuptial agreements.

Using Your Business Structure or Buy-Sell Agreements to Lock Out Your Spouse

If prenuptial or postnuptial agreements are not an option, your business structure or a buy-sell agreement may prevent your spouse from acquiring an interest in the company.

The partnership, shareholder or operating agreement should contain provisions that protect the interests of other owners in the business if one should get divorced.

One requirement may be that unmarried shareholders provide a prenup agreement prior to tying the knot and that the spouse-to-be may waive his or her future interests in the company.

Another way to protect other owners is to prohibit the transfer of company shares without approval from other shareholders or partners. This would also include the right of partners or shareholders to purchase shares or interest of one or both divorcing parties. This requirement would allow company owners to maintain control of the business.