When clients consult with us, we are often asked whether or not the soon to be ex-spouse will be entitled to half of a business due to a divorce. As with most family law cases, it depends. Check out our previous blog about division of marital property and the Equitable Distribution Law in Arkansas. In some cases, a business does fall under the rules of the Equitable Distribution Law, but it is abundantly clear that “equity” is in the eye of the beholder and the accountant. There are things you can do to protect your business before you are headed down the divorce path. Your ex could end up as your business partner if you are not careful. Remember, Christina and Tarek El Moussa from the wildly popular television show Flip or Flop? They built an empire together; therefore, they continued to do the show after their divorce, which I’m certain wasn’t an easy accomplishment and not always pleasant. If your ex does not become your business partner, you could find it necessary to sell the business to raise some cash to give him or her their equitable portion of the business or worse you might lose the business to your ex.
Here are a few things you can do to protect your business from divorce:
- Sign a prenup. If you own your business before marriage, have a prenup in place. Even if your business isn’t worth much when you marry, a prenup is always a good idea. It happens all the time, couples get married with no prenup and one of them starts a business from meager beginnings and 20 years later, it’s a $3 million business, and now the spouse has some stake in the business. A postnup is possible, but a little harder to get your spouse to sign after the fact. A postnup will stand up in court, but preferably when it is signed more than seven years before the breakup.
- Develop a buy-sell agreement. This type of agreement predetermines what happens to a business in the event of an owner’s status change, such as a divorce. The agreement can limit a spouse’s ownership ability and other stipulations set forth.
- Do not comingle business and personal funds. Maintain good records and keep your family’s finances separate from the business finances. Do not borrow from your personal funds to buy equipment for your business. Doing this helps keep the company as separate property and not marital property.
- Pay yourself a salary. If you don’t, a good attorney will argue that your family’s finances were sacrificed to build the business resulting in your ex being entitled to more of the company’s assets. This is also another way of helping to keep the business as separate property.
- Do not let the company employ your spouse. If you do not want your spouse to have a stake in your business, then it is a good idea to keep him or her off the payroll. The more prominent his or her role is within the company and the longer your spouse has worked in the business, the stronger the case a lawyer could make that the spouse helped to build the business.
- Place the business in a trust. A trust keeps the business from being a marital asset, as it is no longer personally owned by you. Of course, a judge will look at the timing of when this was done as in the case of the postnup. Do this from the start and it will have a better chance of standing up in court.
If the divorce is already in the process and you have not done any of the above steps, you may still be able to keep the business as your own. You can offer your spouse other assets in return for a waiver of rights to the business. You can also validate your need to keep the business viable in order to pay spousal support and/or child support payments. Keeping the business intact to remain financially solvent to make support payments can be favored by courts as well.
Handling disputes relating to asset division is an important aspect of divorce and each party to the divorce process needs to have a strong advocate throughout the entire process to ensure their rights and assets are protected. Check out another one of our previous blogs discussing business valuations and divorce. Let Kevin Hickey Law Partners be your advocate. Call or email today to schedule your consultation.