Gab

Gabriel Lalonde
October 28, 2020

Would your business survive a divorce?

If you don’t earn extra money outside of your normal job or business, then this message won’t be relevant for you.

For business owners, there are special considerations to address before they say “I do.” And, if you fail to divorce-proof your business… your business may not survive the end of your marriage.

Business interest is often the business owner’s largest asset. So, failure to protect it from the possibility of divorce is a big mistake.

What can you do to prevent a divorce from decimating your business?

Here’s a few steps to consider:

1) Sign a prenuptial agreement

Nothing takes the romance out of an engagement like discussing a prenup. And yet, it’s absolutely vital, especially if you own a business.

As a general rule, a prenup must not be coerced. It must be in writing, and it must include full disclosure. An experienced attorney will know how to set up a prenuptial agreement that will satisfy the courts.

If you’re already married, then you could pursue a post-nuptial agreement. Same general rules would apply. A post-nuptial agreement can be more difficult to negotiate, so the best time to get an agreement in place is before the marriage.

2) Choose the right business entity

The ownership structure of your business can have a major impact on how your business interest gets divided during a divorce.

A sole proprietorship is the hardest entity to protect. Rules are not well-defined, which can lead to your spouse getting a large share of the business.

A Limited Liability Company (LLC), Limited Liability Partnership (LLP), or a Corporation (Inc.) can give you additional layers of protection. Specific rights and limitations can be defined in business agreements. Those agreements will then determine how much of the business interest (if any) is available to the spouse.

3) Pay yourself a competitive salary

If you don’t pay yourself a competitive salary from your business, it could hurt you in divorce court.

How?

Your spouse can claim that you’ve effectively re-invested a portion of the family income into the business. That could mean a larger share of the business interest can be allocated to your spouse. So, make sure to pay yourself a reasonable wage.

4) Think carefully before involving your spouse in the business

Before you decide to make your spouse a part of your business, ask yourself if it’s necessary.

Do you want to give up any part of the business interest?

Does the business NEED your spouse’s involvement to thrive?

Think long and hard before deciding to formally include your spouse in your business. Once they are part of the business, they will likely be entitled to a share of the business interest.

Working together may seem like a good idea right now… but consider the consequences for your business should you divorce. It’s better to plan ahead for contingencies than to be caught off guard.

Most people don’t marry with the intent to divorce. And yet, divorce happens. Take some time to prepare your business for that possibility. Even if you never get divorced, it will be worth the time and effort spent to protect your business interest.

Finally, be sure to always consult with your attorney. His or her experience and knowledge will help you navigate the legal minefield.

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