Protecting your business in a divorce

Divorce can disrupt your business or your earnings whether you are a majority shareholder, board member or CEO. But there are ways to help assure that ending your marriage, particularly in a high asset divorce, does not harm your business.

Risks

Business may be divided in a divorce based on when it was formed or when you received your ownership interest. In a community property state such as California, your soon-to-be former spouse may get an equal share of your business.

Taking your time and attention from your business also poses risks. Divorce involves legal discussions, collecting information, preparing for negotiations, and dealing with stress.

if you are a substantial business stakeholder, your spouse could receive a large portion of stock and become an uninvited business partner. This can also disrupt business operations and reduce your status in the organization.

There are other complications if your spouse played a substantial role. That spouse may stay involved in daily operations or increase their authority by receiving some of your stock.

A former spouse may sell their stake and leave the organization which could reduce the stock price. There may be long-term tension if that spouse stays involved.

Precautions

Entering a prenuptial agreement before marriage or a postnuptial agreement afterward allows the couple to agree on what happens to the business in a divorce. These contracts cover whether and how it should be divided and its valuation.

Do not use personal assets, such as collateral in your home, to invest in the business. Separating these assets helps determine business ownership.

Pay yourself a fair salary. A reduced salary allows more business assets for distribution in a divorce.

Taking out a whole life insurance policy may help if the divorce settlement costs more than you anticipated. This policy can be liquidated instead of selling your business interests.

You may also consider placing the business in a trust, so there is nothing in your name to divide. But there are laws governing fraudulent transfer of assets and transferring assets into trust before divorce may be prohibited.

Not too late

It may not be too late if you did nothing earlier. You can still sell the business, but the proceeds may be divided in a divorce.

You may also trade assets to keep your business interest. Making settlement payments over time and keeping your business is another option.

You can sell part of the business and offer some of your stock to business partners or employees for quick financing. A buy-back agreement may also be negotiated.

An attorney can provide options to help protect your business. Legal representation may also help assure that the decree is fair and reasonable.