The breakdown of a marriage is a difficult time for most. If one spouse is a small business owner, the pain of the ending marriage can be compounded by witnessing part of the business or value of that business that he or she had worked so hard to make successful go out the door with the marriage. Those who live in community property states such as Arizona, run the risk of a business being considered “marital property.” In this case, dividing the business during a divorce will likely result in a 50-50 split, according to the state’s community property division laws. It is important for business owners to take steps to prevent losing their businesses in the divorce process.
Start Before Divorce is Contemplated
The best way to protect a business from divorce is by taking steps long before anyone seriously contemplates the end of the marriage. One way to do this is for a couple to sign a prenuptial agreement, wherein the parties agree that the business will go to the business owner in the event that the couple splits up. A couple could also enter into a postnuptial agreement stating the same thing. However, postnuptial agreements are challenged more frequently and are less likely to be upheld than prenuptial agreements unless they are prepared properly.
Running the Business
Business owners can do a number of things in the way that they run their businesses to help ensure that they do not lose as much control of the business in the event of divorce:
Partnership, L.L.C. or shareholder agreements: the business should have governing documents that include provisions that protect the other business partners in case one partner gets divorced, such as requiring unmarried partners to obtain prenuptial agreements if they do marry and buy-sell agreements that give the other partners veto power over the transfer of shares and the opportunity to buy the shares instead.
If the court does view the business as marital property, it is important for both parties to get an accurate valuation of the business. It is advisable for both parties to hire an independent valuation expert, such as an accountant, business broker, business analyst or financial analyst. If there is a business valuation, then one spouse will not need to rely on the other to truthfully report the value of the business.
The end of a marriage is often a stressful and chaotic event. The possibility of losing one’s livelihood only adds to the turmoil. If you are going through a divorce and there is a business involved, contact an experienced attorney immediately so you can be advised of your rights and options.