Divorce for Business Owners
If you’re an entrepreneur, odds are good that your small business is your most important and valuable asset. You’ve invested countless days and resources, and like any substantial investment, it should be protected.
For those whose marriage is either in trouble coming to an end, there are several ways to effectively preserve a business. Once the divorce proceedings begin, however, entrepreneurs won’t likely be able to implement some other legal maneuvers that, if accomplished during the marriage, could keep their business from landing in the possession of their soon-to-be ex’s.
Keep in mind, Florida is considered an “equitable division” state, which all marital assets are fairly divided--not necessarily equally. Community property states (e.g. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin)--on the other hand--consider both spouses as equal owners of all marital property (a 50-50 split is the rule).
The following are some effective strategies to consider if a divorce is threatened or already underway and your company is considered a joint asset:
- Keep good records and keep household finances separate from business finances. If you use your family’s finances to fund your business, there is a good chance the other party will be able to obtain some--or even share joint ownership--share of your company. In other words, don’t borrow money out of the family income to buy company assets.
- Pay yourself a good salary. If you don’t pay yourself a competitive salary, and if you deplete the family’s cash flow to grow your business, an attorney might later make the case that your spouse is entitled to more of the business’s assets.
- Use a partnership, shareholder, LLC and/or buy-sell agreements to “lock-out” your spouse. Partnership, shareholding, and other operating agreements can include many provisions which would protect other owners’ interests in the event one of them gets divorced, such as a requirement that unmarried shareholders provide the company with a prenup agreement before getting married or a prohibition against the transfer of shares without the approval of the other partners or shareholders.
- Do not involve your spouse in your business. If your spouse was employed by you or your company, helped operate the company in any fashion, or even contributed to business ideas throughout the marriage, then he or she may be entitled to a significant portion of your business. The more involved your spouse was in business operations, the bigger that percentage would be. If you have partners in your business, then your spouse would own a percentage of your share.
- Pay off your spouse. If, for whatever reason, you were not able to not adequately protect your business and now your spouse is entitled to an ownership interest, you could give him or her your share of marital assets, offer a property settlement note (i.e. long-term payout [with interest]), or sell the business and divide the sales price.